M&A - The Letter of Intent
M&A - The Letter of Intent
When a business is being sold, a buyer typically makes an offer for the business. Next, the seller responds with a counter-offer, which is followed by the negotiation of terms and then, the execution of a Letter of Intent (“LOI”) by both parties. Sometimes, the LOI is called a Memorandum of Understanding (“MOU”). To summarize, the LOI or MOU documents the buyer’s proposed price and terms. Once the LOI is signed, due diligence begins, during which the buyer confirms the condition of the business and the seller confirms the buyer’s ability to complete the deal.
Even though an LOI, or MOU, contains terms that are still negotiable, buyers often get nervous once the document has been executed. During the diligence process, they start double and triple-checking all of the details. Part of the M&A advisor’s job is to facilitate the buyer’s diligence, reassure the buyer, and keep the process moving towards a closing.
Generally, LOIs and MOUs are not binding, but many buyers and sellers view them as binding contracts. Therefore, these documents often include contingencies; more specifically conditions to be met before the offer becomes legally binding. However, certain other clauses of the LOI or MOU will be binding, e.g., exclusivity, confidentiality, timing of the transaction, etc.
Signing the LOI or MOU usually takes the company off of the market during the exclusivity period; thus, the seller should be sure to do some diligence on the buyer’s financial ability before signing. The deal will not close if the buyer cannot pay the purchase price. Thus, it can sometimes be advantageous to accept a lower price from a financially capable buyer as opposed to a higher price from a potentially financially unstable buyer.
Finally, it is critical to thoroughly review the LOI or MOU with an attorney. The seller should also seek advice from their M&A advisor and CPA, if necessary. Sellers should be careful not to focus only on the proposed sales price as there are many factors that affect how good or bad the deal is for the seller.
Versailles Group is a 29-year-old Boston-based investment bank that specializes in international mergers, acquisitions, and divestitures. Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million. Versailles Group has closed transactions in all economic environments, literally around the world.
Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.
More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.
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June 16, 2016
