Terms to watch in an LOI
Someone wants to buy your business? Awesome.? Before you spend a bunch of time with the acquirer, below are the details you’ll need to know.? Much of the language is taken verbatim from a bid instruction letter that one of our investment bankers supplied us with.? ?
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Purchase price and form of consideration.? The purchase price ideally will be for 100% of the outstanding shares of the company.? To make things simple, it should be for the equity only (equity value), which means cash and debt on the balance sheet are not included (enterprise value). ?The offer should be for an all-cash transaction.? If the acquirer is proposing any other type of consideration aside from cash or in addition to cash such as stock, earn-out, seller-note, etc, the offer should describe the proposed structure in detail.?
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Purchase price adjustment.? The offer should detail the proposed method for calculating a purchase price adjustment related to any surplus or shortfall in net working capital relative to a mutually agreed upon target.? In other words, there will be adjustments for AR, AP, accrued expenses, and cash.? The way that adjustment is calculated needs to be understood ahead of time, not once attorneys are involved.?
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Source of financing.? It is appropriate for the acquirer to state where the cash is coming from to buy your company.? Does the acquirer have the cash on the balance sheet now or do they have to get outside debt or equity to fund the deal? If there will be external sources (debt or equity), you need to understand the status and timing of those processes as they could slow down the acquisition or introduce a new party to the table.
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What happens to management.? The offer should summarize intentions with regards to management, and if applicable must include the key terms that will be offered to the management team in an employment agreement, retention agreement or other type of contractual agreement to be entered into at the closing. If the acquirer is requiring you to roll your shares or some of your shares, you need to understand the estimated ownership percentages and structure, as well willingness to work cooperatively on minimizing the tax impact of any such equity rollover or reinvestment.???
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Due diligence.? The degree of due diligence completed prior to submitting the offer will be important. The offer should list all diligence matters remaining outstanding, along with the time needed to complete them and any third-party advisors that will be needed to assist in completing due diligence.
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Indemnification.?? Selling your company involves taking on legal liability; you’re making representations about the business and the acquirer is also making representations about themselves.? The proposal should address the acquirer purchasing insurance coverage for all representations and warranties in the definitive purchase agreement.? Your attorney will insist on this.?
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Transaction Timing.? Timing of close is important and needs to take into consideration all remaining due diligence, necessary regulatory approvals and required financing, and any other facts or circumstances that might affect the timing and/or certainty of the ability to close and fund on a timely basis. ??The acquirer should include a timetable.?
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Approvals. The offer should not be subject to any corporate approvals from constituents such as a board of directors, committee, or limited partners. The offer should indicate that all requisite corporate approvals have been obtained. ?If such approvals are required, you need to know the nature of the approval and the extent of pre-clearance with the decision-making body. Any other expected approvals, required consents and material conditions to consummate the transaction must be clearly specified and estimated timetables for obtaining such approvals must be specified.
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The above are the core tenants that need to accompany a bid for your company.? If these components aren’t well understood ahead of time, attorneys on both sides will fight over them putting the deal at risk and running up exorbitant legal fees.
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Partner at Absolvo Consulting
6 个月Hi Sammy, very useful list. What I would add: is there exclusivity required by the buyer for the negotiations, due diligence? If so, when and how it ends / expires in case they don't confirm the offer. Also, costs. You may have costs incurred with the DD, negotiating SPA etc, what happens if weeks/months later for some reason (MAC, war etc) the buyer walks away. More tricky if you had other offers on the table and you had to freeze discussions with them, OR the company may run out of cash so deal security would be key.