Mergers & Acquisitions, like any industry, has its own terminology and acronyms. If you’ve checked out Calder Capital’s page of listed opportunities and successful sales, you will see that we currently have 6 businesses under LOI with an expected closing in the third quarter of 2017. In this blog we will go over what LOI, or Letter of Intent, is and what it means as a step in the process of buying or selling a business.
A letter of intent falls under “structuring the sale” in the above. Both buyers and sellers need to know exactly what they are getting into, so they must have access to private records that reveal those details. However, no seller will give that access to just anyone off the street. Only buyers who are qualified, committed, and have signed a letter of intent, agreeing to a certain price and terms, are given this opportunity.
A letter of intent, then, is a document the buyer and seller execute after the two have agreed on the basic terms of the sale. It states that the buyer intends to purchase the business and it lays out the terms and conditions of the agreement, for example: purchase price, deal structure, employment/consulting arrangement, conditions to close, timeline and expiration. Typically, the LOI is a non-binding agreement. Once the LOI is executed, the Seller generally grants the Buyer unfettered access to business records. Examining this information is what due diligence is about. If the buyer is satisfied with what is revealed about the business during the due-diligence phase, the next step in the process is drawing up and signing a legally binding contract, or purchase agreement.
What are the advantages of having a letter of intent?
- The letter of intent tells the seller that the buyer is sincerely interested in setting up the terms for a purchase. In many cases, a deposit will accompany a letter of intent to show good faith.
- On the buyer’s part, signing a letter of intent allows access to the information he needs to know to make a good decision. Without it, that isn’t possible.
- A signed letter of intent can make it easier for the buyer to arrange financing to purchase the business.
- Many times a letter of intent will include a “no shop” clause covering a certain period of time. This gives the buyer time to accomplish his due diligence without the distraction or worry about other competing offers.
Are there any disadvantages of a letter of intent?
One disadvantage is that once the letter of intent has been signed, the seller can no longer actively market his business to others. So if negotiations break down, he or she will have lost time and possible opportunities with other prospective buyers.