The LOI: Defining “is”
When contemplating a merger and acquisition (M&A) transaction, it is important to consider each step of the deal process seriously; beginning with the end in mind. Executing a Letter of Intent (LOI) constitutes a critical juncture in the M&A process; however, if it’s that important, why is it non-binding?
The importance of an LOI in M&A negotiations includes:
- Both parties understand the most significant business terms of the proposed transaction.
- Company weaknesses are disclosed before signing the LOI.
- Avoids distractions from business; spending time and money dealing with misunderstandings.
- Avoids performing audits and reviews in the course of confirmatory or final due diligence.
- Sets the tone for future negotiations; signifies comfort levels and expectations.
- Avoids providing potential buyers access to the seller’s most confidential business information.
- Serves as the basis for formal negotiations to the closing documents.
Sellers must understand and agree with all of the LOI terms before signing it. Attempts to change the LOI’s terms after signing will undermine the integrity and trustworthiness of the negotiators and possibly jeopardize the deal altogether.