What to Expect From a Letter of Intent

While each business is unique, the process of selling a business tends to follow a set of predictable steps, one of which is the letter of intent (LOI). A prospective buyer will send an LOI to formally indicate their interest, outlining the preliminary terms and conditions for the acquisition of the business. For sellers, the LOI is an important first point of communication, laying the foundation for further negotiations.

In this blog post, we will break down the key components of a typical LOI to help you understand what to expect and what to look for.

Basic information for shared understanding

The LOI will level-set certain key information to make sure both parties are on the same page. This includes:

The date of its issuance

The acquiring company and the target company with legal names and addresses

The purpose of the LOI: the buyer’s intention to acquire the target company

A high-level overview of the transaction, highlighting the scope and nature of the proposed acquisition

Transaction Structure

The LOI outlines the structure of the acquisition. It specifies whether it will be an asset purchase or a stock purchase and highlights any specific terms or conditions related to the deal structure. This section may also address whether the transaction is subject to financing, regulatory approvals, or other contingencies.

Purchase Price and Payment Terms

It should clearly state the proposed price for the acquisition, along with the payment terms. This could include the form of consideration (cash, stock, or a combination), the timing of payments, and any potential adjustments based on due diligence findings or other factors.

Due Diligence

The LOI typically includes a provision for due diligence, which allows the buyer to assess the target company’s financial, legal, and operational status. It may specify the scope and duration of the due diligence process, along with any access to information or resources required.

Confidentiality and Exclusivity

The LOI should include a confidentiality clause to protect the sensitive information exchanged during negotiations. This ensures that both parties maintain the confidentiality of the discussions and any proprietary information shared. Additionally, the LOI may grant the buyer an exclusivity period, during which the seller agrees not to negotiate with other potential buyers.

Closing Conditions

This section outlines the conditions that must be met before the acquisition can be finalized. It may include obtaining necessary approvals from shareholders, regulatory bodies, or third parties. The LOI might also highlight any specific obligations or representations that both parties must fulfill before closing the deal.

Timeline and Termination

To establish a timeline for the acquisition process, the LOI may include estimated dates for key milestones, such as due diligence completion, the signing of a definitive agreement, and closing. Additionally, it should address the circumstances under which either party can terminate the LOI, protecting both parties’ interests in case negotiations break down.

A letter of intent serves as a crucial first step in the acquisition process, providing a framework for negotiations and establishing the buyer’s serious interest in acquiring your company. Symmetrical has worked with many sellers to navigate the complexities of acquisition. Reach out for a confidential discussion about your unique situation today.