The Letter of Intent & Buyer Selection

After management presentations and site visits, potential buyers decide whether or not to submit a letter of intent (LOI) to purchase a business, if they haven’t already done so. A letter of intent is also referred to as an offer to purchase. Those who have already submitted one may make changes at this time.

The goal is to receive multiple letters of intent. This ideal situation gives your client choice and negotiating power. If the sale process has been properly handled, the client may receive letters of intent from all or most of the buyers that were met with.

Buyers should be given a time frame for providing letters of intent. This ensures that they will remain competitive and that no buyer gets any advantages.

The letter of intent contains the details of what the buyer is prepared to offer in exchange for the business, including terms, and what would be expected of your client with respect to staying on in the business. Everything in it is negotiable but it tells the client where the buyer stands. There may be a gap between what the seller wants and what the buyer wants but the letter of intent provides the opportunity to determine whether or not that gap can be spanned to create a win/win situation.

When considering each letter of intent, your client and the M&A advisor will look at:

• Whether the buyer wants to buy shares or assets
• How much cash your client will receive at closing and how much is held back
• How much the buyer wants to pay as contingent payments
• The details of contingent payments
• How much money the buyer is requesting in the form of seller financing
• Other details that are important to the seller, such as the length of time he is asked to stay with the business after closing, and the terms of any non-competition agreements
• The length of the due diligence period
• Representations and warranties