What Goes In a M&A Letters Of Intent?

By - January 10, 2025 - Uncategorized

When you’re preparing to enter a merger or acquisition (M&A) transaction, an important step is to create a letter of intent (LOI). This document outlines the initial terms of the deal and serves as a roadmap for the transaction. There are several components that the M&A letter of intent should include to protect the buyer and seller. In this blog post, we’ll take a closer look at what LOIs are, what goes into letters of intent, and tips for writing an effective letter.

What is an M&A Letter of Intent?

In a business M&A, the letter of intent acts as a mutual agreement between the buyer and seller and expresses the intentions of each party. The letter documents the basic terms of the proposed transaction and sets expectations for the M&A process. It’s not a legally binding letter, but it can be used as a framework when drafting the final agreement.

While the buyer’s acquisition team or legal team typically writes the letter of intent, the LOI is a signal that both parties—the buyer and the seller—are serious about the proposed deal. The letter helps minimize the risk of disputes between the parties by addressing key terms upfront, helping negotiations go smoothly.

Purpose of a Letter of Intent

An LOI helps ensure that buyers and sellers are on the same page before beginning the due diligence process. By clearly expressing the intent of each party, terms of the deal, and other key information, the LOI helps prevent misunderstandings and encourages alignment between both parties. This also helps save time by avoiding a lengthy negotiating process.

In addition to providing a foundation for the official agreement, the letter can address potential issues or concerns early on and help both parties identify areas where more details are needed before officially entering a business transaction. The LOI can also provide a timeline for the transaction and build trust between the buyer and seller.

What Goes in a Letter of Intent?

Several important components go into an effective LOI, including payment terms, confidentiality agreements, representations and warranties, and more. Let’s take a look at some of the most crucial components.

Transaction Structure and Parties Involved

The LOI should clearly state the type of transaction the deal will be, from mergers to stock purchases to asset purchases. Each transaction type comes with different requirements and implications, so it’s important that everyone involved knows what to expect. In a stock purchase, for example, the buyer receives ownership of the entire company, whereas in an asset purchase, the buyer only takes on specific assets and liabilities. In mergers, people may face complex challenges as two separate companies are combined into one.

It’s also crucial to identify each party involved in the M&A. Who are the buyers? Who are the sellers? List the legal names of each party as well as subsidiaries, affiliates, and anyone involved in facilitating the transaction. Write a short description of each party’s role to help everyone understand how each party will participate in the deal.

Purchase Price and Payment Terms

The purchase price and terms are important parts of the deal and should be included in the LOI. The purchase price may be the price or valuation of the business or of the assets being acquired, depending on the type of deal. The price listed should be the price that both parties have agreed upon. You might also consider including information on how revenue, earnings, and other factors will impact how the final price is calculated. Additionally, include any adjustments that will be made to the purchase price, such as escrow arrangements, capital adjustments, or indemnity holdbacks.

For the payment terms, explain how payments will be made, such as in payment installments, a lump sum, or cash and stock. If there are performance-based payments or earn-out provisions, include details on those as well.

Confidentiality and Exclusivity

A confidentiality agreement and exclusivity agreement help protect sensitive information, benefiting both parties involved in the M&A. Not only do these clauses foster a secure environment for negotiations, but they help build trust between the parties, too.

The confidentiality clause in the LOI should include terms prohibiting either party from disclosing details about the business or the transaction. It should also include how long the clause will remain in effect and if there are any exceptions. Confidentiality agreements help protect proprietary information regardless of whether or not the deal goes through.

The exclusivity clause prohibits sellers from negotiating with other potential purchasers for a set period of time, typically 30 to 90 days depending on how complex the transaction is. This helps protect the buyer’s investment in due diligence.

When drafting a confidentiality or exclusivity clause, you may also want to include information on how breaches of these clauses will be handled.

Conditions to Close

The letter of intent should mention any conditions that must be met prior to the deal closing. This helps prevent misunderstandings and encourages accountability. This section of the LOI often includes:

• Regulatory approvals: Identify any required government or regulatory clearances, such as antitrust approvals or compliance with foreign regulations.
• Due diligence: This this the process the buyer takes to review the seller’s company, including contracts, financial records, legal compliance, intellectual property, and other important aspects. Specify the scope and timeline allowed for the buyer to conduct due diligence, and whether third-party audits or inspections will take place.
• Financing: State whether or not the buyer will need to secure funding. If they do, how much time do they have to secure a loan or other funding? As a buyer, it can also be helpful to include a letter of financial intent or proof of funds in this section.

Representations and Warranties

To encourage confidence in the deal, both parties make representations and warranties. These assurances include important information about the business and each party’s ability to complete the transaction. This section of the LOI includes:

• Seller’s representations: If you’re selling a business, consider including company financial statements, documents showing ownership of assets, and proof that your company complies with applicable laws. Representations may also discuss rights to intellectual property, environmental compliance, employee matters, warranties that there are no pending lawsuits, and other important facts about the business.
• Buyer’s representations: If you’re buying a business, include information on your ability to follow through with the purchase. For example, consider stating your qualifications for buying the business, such as financial capability or regulatory compliance. You might also want to provide warranties that you don’t have any conflicts of interest or undisclosed liabilities that could affect the transaction.

Binding and Non-Binding Provisions

Some components of an LOI are legally enforceable (binding), while others are not (non-binding). Be sure to clarify between the two. Binding provisions typically include confidentiality and exclusivity clauses. They may also include specific obligations, such as performing due diligence by a set deadline. It can be helpful to list out the penalties for breaking binding provisions to help ensure everyone takes them seriously. Non-binding provisions, on the other hand, often include the purchase price, payments terms, timeline of the transaction, and other components that may be negotiable before officially closing the deal. Clearly stating which components are binding and which are not provides transparency and can help prevent misunderstandings between the involved parties.

Tips for Writing an Effective LOI

An effective LOI expresses the buyer’s intent while protecting the interests of both parties. It clearly outlines terms and expectations while allowing for flexibility during negotiations. Consider the following tips when writing the letter.

• Be specific when necessary: Certain components of the letter should include specific details, such as the purchase price and the exclusivity clause. Being vague here could lead to misunderstandings, so it’s better to provide clear information to encourage a successful transaction. At the same time, you can allow for flexibility in the less critical parts of the letter.
• Address potential deal-breakers: Think about the issues that could prevent the deal from going through and how they could be resolved. Such issues may include disputes over intellectual property ownership, challenges around retaining employees, unresolved environmental liabilities, and more.
• Work with a lawyer: An attorney whose practice areas include mergers and acquisitions can help you write an LOI that’s comprehensive, effective, and aligns with your goals. They can also help you identify and avoid potential risks as well as make sure the letter complies with all applicable laws and regulations.
• Set realistic timelines: Due diligence and closing take time, so set timelines that are achievable given how much work needs to be done. Unrealistic timelines can cause people to rush, potentially leading to mistakes, strain on resources, and unnecessary stress. Realistic timelines, on the other hand, allow for proper due diligence and effective collaboration.
• Strive for collaboration: The letter should be mutually beneficial to both parties involved. When writing the letter, emphasize your shared goals, as this can encourage trust and positive experience for everyone.

Get Help from a Business Lawyer

There’s a lot to think about when drafting a letter of intent. A business lawyer can guide you through the process, helping you consider your goals, address potential risks, and include all necessary letter components. Working with an attorney can be a great way to save time, gain valuable insight, and encourage a successful transaction.

Contact Stevens Law

Need help drafting a letter of intent? Contact Stevens Law today to request a free consultation. Give us a call at (614) 826-3100 or fill out our online contact form.