M&A Letter of Intent (LOI) Basics: Purchase Price

By Drew Stevens - April 27, 2019 - Mergers & Acquisitions

After months of market research and review, you’ve found a business you want to buy. If you’ve been reading up on mergers and acquisitions, you may feel the need to rush straight to an asset purchase agreement or a stock purchase agreement, without first talking to a Columbus mergers and acquisitions law firm. While there’s nothing preventing you from doing this, you may wish to first send a letter of intent.

Taking the time to properly draft and negotiate a letter of intent can save both the buyer and seller in an M&A transaction a significant amount of time, negotiating headache, and legal fees. By being proactive in addressing key deal points like the purchase price, holdback, employment, and other transition issues, both buyer and seller can often move through preliminary negotiation and due diligence faster.

Here, we’ll tackle everyone’s favorite part of the deal—the purchase price, as well as some ancillary purchase price issues.

Calculating Acquisition Price

Often times the biggest issue for any buyer and seller, purchase price is usually addressed front and center in a good LOI. Beyond just the purchase price alone though, there are a few additional points you may wish to address.

Perhaps you’re unsure of the exact amount of your offer, and your final offer may depend upon what you’ll find in due diligence or depend upon certain contingencies. Don’t be afraid to state a range for your purchase price. But making your purchase price range too great will invite more issues. Mergers and Acquisitions Due Diligence: Financial and Operations Review

For example, say you wish to initially offer the seller $50 million. Stating a price range of $25 million to $75 million won’t do either party any good—the seller will hear $65-75 million, and you’ll hear $25-35 million. Be narrow with your purchase range; in this case, $48 to 52 million.

What is M&A Holdback?

Another core part of a good M&A deal and buying a business is giving full consideration to the holdback amount. In addition to specifying that actual amount of the holdback, going into a bit of a detail regarding the holdback mechanics can save significant time in drafting and negotiating the asset purchase agreement or stock sale agreement in the future.

For example, the seller may be very interested in how long the holdback period may be. Depending on the size of your M&A deal and the amount of risk involved, the period could be six months, twelve months, or eighteen months. As for the amount of the holdback, the percentage also depends on the amount of the purchase price, risk involved, and the holdback time period. Generally, though, ten percent is a fairly average amount.

Net Working Capital and Debt

It may be overkill to go into great detail regarding net working capital and debt issues in the letter of intent, but it can be worth it to at least briefly address these areas. As the buyer, addressing your expectations with net working capital can help prevent seller from making significate capital expenditures or taking other financial actions that you may not have considered.

The same goes with debt. Buying a business that suddenly takes out a $500K loan right before closing can make for an interesting first day. You may want to consider briefly covering high-dollar value actions and decisions in your letter of intent.

Mergers and Acquisitions Attorney Columbus Ohio

Our firm’s mergers and acquisitions lawyers have closed millions of dollars’ worth of M&A transactions, representing both buyers and sellers. Generally, experience has shown that a great letter of intent can lend clarity to and greatly expedite the negotiations in buying or selling a business. If you feel that we can help you craft a letter of intent, do not hesitate to contact our firm today.