Letter of Intent (“LOI”)

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What It Means

A Letter of Intent, commonly called an “LOI”, refers to a Buyer’s written expression of interest in purchasing a company. It is one of the first formal steps in the Acquisition process and it outlines key terms, expectations, and timelines, which often include:

• Valuation - The headline term for the LOI is the Business Valuation, including the structure and timing of payments.

• Funding Conditions - An LOI should clearly outline the sources of the proposed funding for the Acquisition, especially if a portion of that funding is expected to include Seller Financing.

• Escrow - How much of the purchase price will be held in Escrow and how soon those funds will be released to the Seller.

• Purchase Structure - Whether the Buyer is proposing a Stock Purchase or an Asset Purchase. If an Asset Purchase is proposed, the Buyer should also specify which assets are included.

• Due Diligence Expectations - An outline of the Due Diligence process and timeline gives the Seller an idea of how the Buyer expects the process to progress.

• Seller Rollover Options - Details whether the Seller will be offered an option to rollover or buy-in a portion of equity in the post-Acquisition entity.

• Closing Conditions - A Buyer’s ability to efficiently manage the diligence process and close a deal on time is an important characteristic.

• No Shop/Exclusivity Period - Buyers will often ask for a window of exclusivity to conduct Due Diligence and work towards a closing. If the Buyer is an individual only looking to purchase only one business, the Seller should request that the exclusivity be mutual to keep the Buyer focused on progressing the deal toward a closing. Sometimes a Seller can request a deposit in exchange for a No-Shop Clause to offset costs and missed opportunities should the deal fall through.

• Working Capital - Details how Net Working Capital will be calculated in the event adjustments need to be made at Closing.

• Non-Binding - LOIs are generally non-binding and should explicitly state as much. However, some terms, such as confidentiality and No-Shop provisions, are commonly defined as binding within the document.

• Purchase Agreement - The LOI should clearly state that it will be superseded by a legally binding Purchase Agreement upon successful completion of Due Diligence.

Why It’s Important

There are still many unknowns at this early stage in an Acquisition process, but the sooner a Buyer and Seller can begin having difficult discussions and coming to agreement on critical terms, the more likely a deal is to close down the road. Sellers should be wary of offers that seem too good to be true or that avoid nailing down key terms of the deal. Diligence is time consuming and distracting, and it’s in the best interest of both parties to “get to no” fast if there is no deal to be made. In addition, there is a large opportunity cost to accepting an LOI that requires exclusivity and having that deal break apart down the road.

Related Terms

• Acquisition

• Best Alternative To a Negotiated Agreement (“BATNA”)

• Business Valuation

• Due Diligence

• Escrow

• Indication of Interest (“IOI”)

• Net Working Capital

• Purchase Agreement

• Seller Financing

• Zone of Possible Agreement (“ZOPA”)

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