LOI: The Letter and the Spirit
A letter of intent (LOI) is a nonbinding but authoritative document that defines the terms under which the purchase of one company by another will proceed. When a buyer and a seller reach the LOI stage, they'll have agreed that the potential fit looks good and that due diligence—the research phase that structures and certifies the transaction—can begin. In this post, we'll review the steps the seller should take once both parties have signed the LOI. The buyer's post-LOI agenda will be the subject of the next installment.
There's no set-in-stone format for LOIs, but all of them will spell out the parties' general understanding of:
- purchase price
- seller's assets
- terms of payment
- responsibilities under a “no shop” provision that enjoins the seller from talking about the sale of the company with anyone else while discussions are under way. (This is one of the few obligatory features of the LOI.)
As the seller, you now must begin to think in concrete terms about how you will convey your assets to the seller and what will happen after the company leaves your ownership and control. New Direction Partners advises its selling clients to focus on five tasks after signing:
1. Hire a deal lawyer, and involve your accountant. The legal requirements that govern M&A transactions are very different from those that apply to contracts and real estate. The attorney who represents you must be well versed in representations and warranties, indemnification, and the many other specialties of this complex body of law. Because the risk to the seller in an M&A transaction can never be zero, your counsel must be a skilled practitioner of everything that can be done to hold your risk to a minimum. Needless to say, your accountant should be privy to all that is going on so that there will be no disconnect between your financial situation and your legal posture.