The Letter of Intent (LOI)

In the most recent Stay Tuned, I discussed the importance of the Non-Disclosure Agreement (NDA). That being done, the next important document is the Letter of Intent (LOI). As with the NDA, the LOI can vary from situation to situation. In the end, the LOI expresses a qualified buyer’s intent to buy a company, its price, price components, and its structure.

After months of discussion, probably with three or four qualified prospective buyers, one or more of them may issue a Letter of Intent.  Sometimes there may be a less formal, Letter of Interest or Term Sheet that will precede a Letter of Intent. Each will spell out what the prospective buyer has in mind for the acquisition of the seller’s company, including enterprise value, transaction structure, and the enterprise value components. Other issues will be put forth too, including on-going confidentiality, a schedule for due diligence, a projected closing date and more. 

Does all of this sound confusing? It really isn’t; whether a Letter of Interest, Letter of Intent or a Term Sheet, it simply explains the prospective buyer’s perception of value and the purchase structure and the timing.  For the seller, having received one or several of these expressions from a prospective buyer means that it is time for soul-searching and taking a further step toward the finality of divesting oneself of all or the majority of shares in their company. It’s not the final step, but when one LOI is accepted, it means that the seller is prepared to proceed with due diligence, perhaps some fine-tuning negotiations and on to a closing. 

Keep in mind that, while the discussions after an agreement to the LOI should be conducted in good faith by all parties, the LOI is not binding except for confidentiality, any no-shop provision, and perhaps others. It is non-binding in that neither party is bound by the absolute requirement to complete a transaction. Sometimes, things happen that are beyond control and people can change their minds. This is rare, but it can happen.

The LOI is usually prepared by a prospective buyer’s attorney, then sent on to the Seller’s attorney for review and comment. This may prompt some last-minute negotiation or clarification. It may also trigger the need for additional confidentiality language and may include a non-solicitation agreement, protecting the seller from having their accounts solicited by the buyer. For the record, while I have seen non-solicitation agreements being part of the LOI, I have never seen a violation in which the buyer raids the seller’s accounts, with or without a non-solicitation agreement in place.

Once the LOI is agreed upon and signed, it is time to prepare for the Due Diligence process, which is the process in which the prospective buyer will have the opportunity to see back-up for the initial information that has been received from the seller before the LOI was agreed upon. The list of information required by the buyer can vary from buyer to buyer, however, it will usually include very private and complete information. Its purpose is to support what has been purported. Often the information is sent from the seller to the buyer, electronically, lessening the need for travel and disruption to the seller’s office. However; not everything can be done electronically. Due diligence will usually include joint visitation to the seller’s key customers and interviews with the seller’s key management people. 

It is very important that, at this point, the buyer and seller remain committed and trust one another. It is quite possible that the Due Diligence will cause the buyer to adjust the price. This is not necessarily usual, but it can happen. The adjustment, if any, is usually not material, whether up or down, and is agreed upon by each party.

The Due Diligence process can evoke certain emotional responses, especially from the seller. It is a time when the realization that the company that has occupied the seller’s life will soon be in the hands of someone else. Depending on the deal structure, the seller may still retain some ownership, but it will be somewhat different. While the individual seller may have to grapple a little with this, most transactions that get through the Due Diligence process will go the distance to a closing.

 I will address the Due Diligence process in greater detail in a later Stay Tuned.

This is the second in a series of Stay Tuned articles about the M&A sector of the Building Services industry. While there are some absolutes for the acquisition of a company, there can be variances in the process, depending on the preferences of those involved in the process. As always, I will put forth GPA’s experiences that cover the past several decades.

I welcome your comments and questions and can be contacted at 843-645-1937 / 843-290-3574 (cell), or [email protected]. Christi Rohmer, CPA, and a senior GPA Associate can be reached at 210-572-4447, or [email protected].