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.
2. Make your numbers. At the risk of stating the obvious, you'll still have a business to run and projections to meet after you sign the ROI. If you miss a forecast, you may be confident that sales and profits will bounce back, but the buyer probably will not share your optimism. Failure to make numbers injects uncertainty and ranks among the top deal-killers in M&As. Stay focused on hitting all of your business targets!
3. Respond to due diligence requests on a timely basis. Speaking of deal-killers, we have seen tardiness on the seller's part undermine more than one otherwise promising M&A. Expect a continuous stream of requests for information from the buyer while due diligence moves forward. Responding to them ASAP will go a long way toward getting the deal done.
4. Develop a communication plan. M&A negotiations should proceed in confidence, but some stakeholders must be brought into the loop at the right moments to protect the integrity of the deal. This applies in particular to your customers, whose loyalty is the asset your buyer values the most highly. Your communication plan should specify who will be told, when, and what steps will be taken to assure key accounts that there will be no interruption in service during the transition of ownership. Depending on how it is handled, communication is a make-or-break element of M&As.
5. Think about and plan for life after ownership. This is what my New Direction Partners colleague Peter Schaefer calls taking “An Emotional Walk on the Beach.” For the seller, an M&A isn't just a business transaction—it's a resetting of personal expectations and, often, the embrace of a new set of personal goals. Will you remain active in the industry? If the buyer wants you to stay on in a post-sale management role to help make the transaction a success, will you be comfortable playing the ex-boss working for a new one? Many owners are entrepreneurs whose entire adult lives have been defined by building the businesses they are putting up for sale. Life after ownership can be just as rewarding in its own way—if you begin charting your course now.
Cover all of these bases, and you can sign your LOI with confidence and enthusiasm. Don't hesitate to seek qualified advice about any aspect of the deal as you progress toward closing.