Negotiating Your Letter of Intent in the M&A Process
Picture this – a buyer knocks on your door with what seems like an ideal offer and all you have to do is sign a letter to execute the deal. All too often M&A advisors see business owners sign a letter of intent (LOI) without seeking proper counsel, leaving little opportunity for negotiation, and often the seller in an unfavorable deal. The LOI can be the most important part of a deal and should be carefully designed so that the intent of both the buyer and seller is clearly defined, including what the seller is willing to sell for the proposed price and terms and what the buyer is willing to pay.
Our M&A Advisors outline key items to include in an LOI before it’s signed:
Parties: Clearly set forth the identity and brief description of each party involved in the transaction.
Structure: Describe the business and tax structure of the transaction, specifying what will be acquired or sold. Transactional structure items should include cash or notes, sources and use of funds, and the expected capital structure immediately after closing of the new company. You should also consider if a stock or asset sale is planned.
Purchase price: Establish the total purchase price, payment terms and allocation of purchase price. Payment terms may include cash at closing, promissory notes, performance payments, royalties/fees, purchase price adjustments, working capital and liabilities to be assumed.
Working Capital: Include a general description of how working capital is expected to be calculated and either what the target is or how it will be determined.
Offset Rights and Guarantee of Accounts Receivable: Address the ability to reduce the purchase price in the event accounts receivable are not collected and whether it should be adjusted should any representations and warranties regarding value are not correct.
Security/Collateral: Identify the security/collateral provided as security for any deferred payments, such as assets acquired, personal guarantees, other buyer assets, stock pledge and more.
Consulting or Employment Terms: Outline the basic terms, such as time commitment, compensation, severance terms and benefits, as needed, if the seller intends to provide consulting services or maintain employment with the company following the transaction.
Noncompetition: Establish the terms, geographical area and description of prohibited activity, if needed.
Real Property Facilities: Provide the assumption of lease, terms to acquire real property facilities, hazardous waste inspections and indemnities and compliance with zoning and other governmental regulations, if any.
Representations and Warranties: Set forth the general nature of the type and extent of representations and warranties to be made by the parties involved. Define operational and fundamental representations, the indemnity cap and baskets expected and overall term of each type of representation.
Timing: Determine a timeline for due diligence, documents and other conditions prior to closing. An ideal timeline usually provides approximately five days for requests/lists, 30 to 60 days for financial due diligence and timing to establish a term sheet for financial arrangements (if appropriate).
Deal Terms: Negotiate both the terms and price of the deal. Sellers often focus mainly on the price but terms can also make a strong impact on the transaction. In one case, a client negotiated the price but Doeren Mayhew Capital Advisors’ recommendation on terms increased his net after-tax proceeds by almost 25 percent.
Based on your transaction, some of these key items may not need to be considered in your LOI. The most important thing to remember is the seller has full control to negotiate the terms of an LOI before it’s signed.
Working with a licensed investment banker, such as those at Doeren Mayhew Capital Advisors, can help you negotiate LOI based on what you hope to gain from the deal. For more information on the M&A process and how to ensure to maximize your deal, contact us today.