What Makes a Great Letter of Intent?

Selling your title agency can be complicated. There are many ways to proceed. Determining the best way to go about things can be a daunting task!
 
Experience has taught us that the best way to proceed usually involves a separation of high-level deal ‘structure’ versus ‘detail’.
 
No one wants to waste time.
 
Determining early on if all parties are on the same page can avoid a lot of heartache and expense down the road. Unscrupulous buyers know this and may try to lure you into a ‘detail’ discussion first so as to gain insight you might not want to disclose and use that insight against you.
 
A Letter of Intent (LOI) is a (mostly) non-binding document which outlines the ‘understanding’ between the buyer and seller. It helps ensure that everyone’s views on your transaction are aligned.
 
There are many ways to go about creating a LOI. How detailed should the LOI be? On the one hand, other than provisions related to confidentiality, exclusivity, reasonable cooperation/access to due diligence, and the general obligation to negotiate in good faith, LOIs are non-binding and therefore either party can elect to walk away from a transaction and/or attempt to re-negotiate key business terms. For this reason, some LOIs only include the most high-level terms and save many substantive business and legal points to be negotiated at the definitive document stage. While this can be a perfectly valid approach, it carries risk as the parties may spend a great deal of time and money pursuing a transaction only to eventually realize there is an impasse or “deal breaker” around a key term that could have been fleshed out much earlier at the time of signing the LOI (e.g. escrow hold backs, purchase price adjustments, working capital adjustments, tax treatment…etc.).
 
The approach we like is for the LOI to include as much detail as possible. This approach leaves less room for negotiation around major points and can shorten the due diligence and documentation process to be more confirmatory than confrontational.
 
Some of the examples of issues we like to see negotiated at the LOI stage are:

  1. Structure of the Transaction: will it be an equity sale or an asset sale? Are there any assets of the business that the buyer does not want? Is the transaction going to be cash free / debt free at closing? Will the buyer be using debt for the acquisition? 
  2. Valuation: what is the total value of the transaction and how was it calculated (e.g. multiple of EBITDA). Will there be an adjustment to the purchase price/valuation if the EBITDA number is higher or lower after thorough due diligence and a quality of earnings report?
  3. Consideration: what will be the mix of consideration between consideration paid at closing (cash or equity) and consideration held back or earned over time (e.g. escrow, earn out, seller note, carried equity…etc.)
  4. Employment and Compensation: will the sellers still be involved in the business? For how long and under what employment terms? Will the seller(s) be required to enter into non-competition agreements?
  5. Management Structure: who will run the company after closing? Will there be a board of directors? Will the sellers, if still involved, have a board seat or other say in company management?
  6. Due Diligence and Exclusivity: for how long do the parties agree to exclusively negotiate with each other? Who will bear the costs for the due diligence and quality of earnings process?
  7. Funding: does the Buyer need to raise outside debt or equity to complete the acquisition? If yes, what will this process entail and can it be expected to be run in conjunction with the buyer’s due diligence process or will the acquisition happen in two phases with the initial diligence done by the buyer and then a separate approval process required by equity or debt investors?
  8.  Third Party Consents: if the company has contracts with customers, suppliers or other vendors that are material to the business operations and these contracts require the consent of the counterparty to either assign to the new buyer or in a change of control (if an equity sale), will the buyer insist on obtaining said consents prior to closing the transaction or will the parties agree to work together to obtain as many as possible during the due diligence phase but cooperate after closing to obtain the rest? The answer to this can substantially impact the timing of closing.

The due diligence process in a merger or acquisition transaction can take you away from running your business. It’s time consuming. Time is money and getting a proper LOI at the outset can only improve the odds of your transaction ultimately closing.
 
 
The professionals at Turk & Company have decades of experience in helping business owners navigate the sale process. To learn more, please contact us at deals@turkandco.com 

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