Understanding Letters of Intent in the M&A Process

Selling your business? Eventually during the M&A process, the moment of truth will come and your advisor will ask the potential buyers to provide formal letters of intent (“LOIs”). While letters of intent can take many forms, it is important to understand what they are and what they aren’t.


Most importantly, LOIs are generally not binding on the buyer. Typically, the only binding part of the LOI is that you will be agreeing to a period of time where the buyer has the exclusive right to work with you on a potential transaction, and that you will not seek other offers during that period. This exclusive period typically ranges from 60 to 180 days, depending on the perceived complexity of the transaction.

The reason for the exclusivity is that at this stage, the buyer will start spending significant amounts of time and resources to complete the transaction. It is not uncommon for buyers to spend hundreds of thousands of dollars getting a lower middle market deal across the finish line. The buyer you select will likely not want to proceed unless you are giving him an exclusive opportunity to work with you. This does not mean that you can not terminate the transaction, but most LOIs require a formal termination of the document.

The rest of the letter of intent will contain an outline of the business terms (and some of the legal terms) of the deal. While it is good practice to be clear on the terms included, most of the time the parties are working with limited information about each other at this stage. Consequently, it is not surprising to have terms get added, subtracted, or changed over the course of the transaction.

Michael Schwerdtfeger’s eBook “The Inner Workings of a Deal: Tips for a Successful Transaction” is now available for download on his website. Get your free copy here: http://mbsmergers.com/downloads/ 

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