M&A: Due Diligence & Letter of Intent

November 3, 2022

In M&A deals, a letter of intent (“LOI”) and due diligence are two of the most important steps of the transaction. A lack of understanding of either step can make or break a deal.

The M&A process creates a lot of uncertainty and stress for everyone involved. You must make sure you cover every angle and protect your company’s interests as best as possible.

With so much on the line, the due diligence part of the process should not be taken lightly. This part of the M&A process allows you to pick through all the details with a fine-tooth comb.

Let’s take a closer look at the roles a letter of intent and due diligence will play in your next M&A deal.

What is an M&A Letter of Intent?

When you’re scouting for M&A targets, it can be difficult to know where to start. But once you do, an acquisition can open a world of new opportunities and increase your company’s reach at the same time.

Not everyone has the knowledge needed to write an effective M&A letter of intent. Even if they do, they might not have access to everything they need to get started.

At first glance, the letter of intent is one of the most important documents you can write when it comes to M&A negotiations.

It’s a structured process that lays out all the details about any potential deal — from how much money each company will invest to how long their current agreements will last once the acquisition goes through.

“You have to state the parties, what’s being sold or bought, and if the companies are merging, then who’s merging where,” says senior attorney Michael Brandwein. “The price is very important, along with other special considerations like confidentiality.”

The LOI may also include details regarding asset purchases, any assumed liabilities, and the timeline for the due diligence phase of the transaction.

Although most of the terms of the letter of intent are non-binding, it’s important to be aware of the binding provisions of an LOI.

M&A: Non-Binding vs. Binding

Most LOIs are non-binding due to the potential of the terms of the transaction changing depending on what’s discovered during the due diligence phase.

“Think of a letter of intent as a contract; within this agreement, you’re probably going to have some binding and non-binding clauses, “says Brandwein.

“It’s all up for negotiation. You could have all of it be binding, or you can choose which sections are binding and which are non-binding.”

The purpose of the non-binding terms of the M&A letter of intent is to propose major terms such as structure and purchase price.

With a non-binding LOI, the parties don’t intend to be bound to the transaction until a purchase agreement is signed, which usually occurs sometime after the completion of due diligence or, in many cases, at the closing.

Although the majority of an LOI can be non-binding, a common mistake to avoid is to assume the entire document is non-binding.

Binding provisions may include but aren’t limited to confidentiality, expenses, and exclusivity, also known as the “no shop” clause.

The confidentiality clause prevents the disclosure of information shared between the two parties presented to the public before the deal is done.

The “no shop” clause is included in most LOIs to prevent the seller from finding another buy in the middle of the negotiation.

It’s always in your best interest to have a knowledgeable M&A attorney help you create and review your letter of intent as you prepare for the due diligence phase.

What Is Due Diligence?

Due diligence is the process of conducting an audit to determine the legal and financial risks involved in a business deal.

It’s important to understand that there is no “right” or “wrong” level of risk when conducting your diligence — it’s entirely up to you and your team to prioritize risk and find the balance between the acquisition target and your own financial health and stability.

Due diligence is important because it allows you to identify if there are any hidden risks in the acquisition target that you would want to avoid if you were to close the deal.

It also helps you assess whether the acquisition target is a good investment, as well as how it fits within your company’s strategy and financials.

Why Is Due Diligence Important?

When conducting your due diligence process, you want to identify both the strengths and weaknesses of the acquisition target.

This will allow you to make an informed decision as to whether to proceed with the acquisition or look for a different acquisition target.

When doing your due diligence, you should aim to get as much information as possible about the target company.

This includes reviewing the company’s organizational documents, annual reports, financial statements, and tax returns to assess the company’s financial state, researching the company’s products, services, and niche to understand the key benefits and drawbacks, and the company’s strategic initiatives to understand its priorities.

If you’d like some extra help conducting your own M&A due diligence, we recommend consulting with an experienced M&A lawyer about getting them involved to help conduct the research and identify any risks associated with the acquisition target.

How Long is the Due Diligence Phase?

Due diligence is a process that involves a lot of research — both online and offline — to gather relevant information about the target company.

The information you gather during this process will help you identify potential risks and determine if the acquisition target is a good investment for your company.

There are many ways to conduct due diligence, but the most common method is to conduct a “walk-through” with the key executives of the company you’re evaluating.

During the walk-through, you will have the chance to ask them specific questions about the business, evaluate their response, and decide if this would make a profitable partnership.

With so much complex information involved, the due diligence process can take a few weeks or several months.

Your due diligence team should include an experienced M&A lawyer, accountants, and other consultants who will prepare a detailed checklist of all the documents and information you should review.

Typically, corporate records, IP agreements, litigation history, and stockholder information are among the most common documents requested during due diligence. Additional documents may also be required depending on the type and size of the target company.

Mergers and acquisitions can be complex and require a lot of constant communication between the buyer and seller. This step, although tedious, may be one of the key differences between a successful and failed deal.

Need Help With an M&A Deal? We Can Help!

Whether you’re a small business looking to sell your company or a larger business interested in acquiring a business.

Our skilled team of attorneys can help you prepare your LOI, review documents during due diligence, and every other step of the M&A process.

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