A solidified handshake

One of many first steps within the M&A course of is negotiating and signing a Letter of Intent (“LOI”). Letters of Intent are non-binding statements of understanding between a vendor and purchaser that set forth the important thing phrases upon which they intend to enter into an settlement. The LOI will sometimes be not more than 10 pages lengthy and contact upon key deal factors, leaving the finer deal factors to be negotiated within the Buy Settlement.

Although most provisions in an LOI are non-binding, the signing of an LOI, very similar to an engagement ring in marriage, indicators that the events are critical about eager to transact with each other. It is very important contain your lawyer within the course of from the start as a result of if a key time period isn’t negotiated in your favor or is in any other case unnoticed of the LOI, will probably be very tough to renegotiate for its inclusion within the definitive Buy Settlement. Additionally, the lawyer will ensure that to incorporate particular language within the LOI to protect its non-binding nature.

A few of the typical phrases negotiated in an LOI embody:

1. Buy Worth – How a lot is the customer paying? Will the customer pay money upfront or will a portion be paid over time within the type of debt? Will the debt be vendor financed; for instance, by way of a promissory word? Will a portion be paid in inventory or fairness of the acquirer? If that’s the case, what safety can be provided? Will there be an earn out (i.e. a part of the acquisition worth is predicated on the longer term efficiency of the corporate)? What buy worth adjustment mechanisms (similar to a working capital adjustment) will come into play?

2. Deal Construction – Will the deal be an asset sale or a inventory/fairness sale? There are vital authorized and tax penalties to every construction to contemplate so contain your lawyer and accountant on this course of. For instance, generally, a inventory buy can be extra tax advantageous to a vendor and an asset buy can be extra tax advantageous to a purchaser.

3. Escrow and holdbacks – Typically occasions a portion of the acquisition worth can be held again or positioned in escrow to cowl future funds for previous liabilities.

4. Closing Date and Circumstances – When will the deal shut and beneath what situations? What duties, approvals and consents have to be in place on or earlier than closing?

5. Due Diligence – How will due diligence be carried out and for the way lengthy?

6. Exclusivity – As a result of money and time put into finishing the due diligence course of plus drafting and negotiating the acquisition settlement, a purchaser will sometimes require the vendor to cease entertaining affords from different consumers throughout a set exclusivity interval. This sometimes runs wherever from 30-90 days, or longer, relying on the complexity of the deal.

7. Representations and Warranties – A big portion of the Buy Settlement can be devoted the Representations and Warranties of the vendor (“Reps and Warranties”). The Reps and Warranties will decide danger allocation between the events after closing. If the vendor Reps and Warranties change into incorrect, the vendor could must indemnify (reimburse) the customer for future damages incurred, or the customer could also be entitled to set off a portion of the acquisition worth from a word fee, holdback or escrow quantity. Whereas normal Reps and Warranties in all probability received’t be listed within the LOI, if the customer desires one thing that isn’t normal it could be included.

8. Submit-Closing Employment Affords – Will key members of the administration crew (or different workers) keep on post-closing? Below what phrases? Will they be topic to a Non-Compete?

9. Governing Regulation – Don’t assume all jurisdictions are the identical.

10. Confidentiality– This is among the few clauses that’s usually binding in an LOI. As a result of sensitivity of the data that can be disclosed in the course of the due diligence course of, it’s paramount that such data be saved confidential, notably when the customer and vendor are opponents.

After an LOI is signed, the due diligence course of begins.

Whereas from a authorized perspective, LOIs are important paperwork, they aren’t obligatory. Consequently, inexperienced events wanting to save cash would possibly skip over this course of and go straight to drafting a Buy Settlement. That is notably true in smaller offers the place consumers aren’t counting on the LOI to offer preliminary documentation for lender or board approval.

Nevertheless, the well-known proverb, “A sew in time saves 9,” applies right here. LOIs reduce wastes of money and time by setting the expectations and timelines for the events and guaranteeing there’s a widespread consensus earlier than the events make investments vital time, cash and power into the acquisition course of. Having an LOI in place will maximize the chance that the transaction will shut and can reduce the chance of misunderstandings and renegotiations between the events at a later date. In the end time is among the high killers of offers and a scarcity of readability of key phrases on the LOI stage will finally gradual the acquisition course of and enhance the probability that the deal will disintegrate.

In case you are a purchaser or vendor that is able to negotiate an LOI, the attorneys at Enterprise Lawyer Austin can assist.