M&A Legal Tips And Best Practices: The Purpose of a Letter of Intent
The LOI is a deal process with high-level terms. Some LOIs look like a purchase agreement light.
They include what the purchase agreement will have, listing basic reps, warranties, and non-compete terms.
If any terms are material to a deal, it’s good to include them, especially if a seller finds them important.
If the seller is 32 years old and selling a booming company, you might want to state upfront that you’ll require a five-year non-compete.
Otherwise, exclusivity and basic deal terms are what I want in an LOI.
Everything else can be covered in the purchase agreement.
One area that can be a pro or con is working capital in an LOI.
My template LOI includes a reference to a normalized amount of working capital.
It prevents friction at an early stage and signals that working capital is expected, whether inventory or AR.
On main street, as soon as you mention working capital, eyes glaze over.
Brokers get concerned they are talking to private equity in disguise.
It might make you seem difficult and push your LOI to the bottom of the stack.
But if you submit an LOI without referencing inventory or working capital and later demand it, that can erode trust.
It can feel like retrading.
I advocate for a reasonable amount of critical detail in the LOI but not too much.
Some LOIs include reps and warranties, durations or indemnifications with caps and baskets.
That’s okay but doesn’t make you a more attractive buyer, especially in a bidding situation.
Leave that for the purchase agreement.
If the deal falls apart during due diligence, I’d rather not argue over unnecessary LOI details.
Recently, I was working on a deal, and here’s the problem with lawyers.
Myself included.
When we see something we don’t like, even in a non-binding LOI, we redline it and send it back.
I was on my third round of LOI revisions when the accountant emailed:
"It's an LOI. Get it signed."
We'll dig into the business later.
Be cautious, as it depends on the deal, but there is truth in needing to get the business under LOI to buy it.
You won't get it faster by including excessive detail.
