What is a Letter of Intent in M&A Deals?

February 2023

What is a Letter of Intent in M&A Deals?

A letter of intent is a key document in the M&A process. It’s essential that buyers and sellers understand what it is and how to maximise value.

In this article, we’ll tell you everything you need to know about letters of intent and how to write one if you’re buying or selling a business.

What is a letter of intent in M&A?

An M&A letter of intent (often shortened to LOI) is a written document that outlines essential information about the transaction. This will include:

  • Identification of the parties involved
  • Company being acquired
  • Basic terms of the deal
  • Due diligence process
  • Binding agreements
  • Purchase price

In most cases, the prospective buyer will send an LOI to the seller to formalise their interest in purchasing the company. If the seller accepts the LOI, both parties will sign the document and move straight into the due diligence stage of the transaction.

Why is an M&A LOI important?

Saves time and money

An LOI is essential because it puts the terms and conditions of the final M&A deal into writing. Having clear terms minimises misunderstandings and makes it easier for the buyer and seller to negotiate and reach a mutual agreement.

Working through an LOI saves time and money by allowing all parties to determine if there is an agreement of basic terms early on. This helps to avoid delays and issues later down the line.

Improves transparency

LOIs improve clarity and transparency during M&A deals. They provide the buyer and seller with a roadmap during the M&A process and become the outline for the purchase agreement.

Creates trust

An M&A letter of intent shows the seller that the buyer is acting in good faith and is serious about the deal. This helps to build trust and improve communication between the parties.

Increases success rate

Negotiating a detailed LOI at the outset of an M&A deal significantly increases the chances of a successfully completed transaction.

An LOI makes sure that everyone is on the same page and improves the speed and efficiency of the M&A process.

Is an M&A LOI binding?

An LOI is usually drafted to be non-binding, but there are some exceptions to this rule. Binding terms usually relate to how the process is managed, such as maintaining exclusivity and confidentiality. For that reason, a court may determine that an LOI is binding in certain situations.

Suggested reading: Is a Letter of Intent Legally Binding?

Tips to write a good LOI in M&A deals

  • Keep your LOI concise: A letter of intent should be between 2-3 pages long, although some are as little as one page. Make your LOI short and engaging.
  • Establish the right tone: Your LOI can be formal and direct, but it shouldn’t sound aggressive. Focus on writing a persuasive argument that will make the seller feel like they’re getting a good deal.
  • Use a free template: You can download a template if you want help writing an M&A letter of intent. When you join Foundy, you have access to an LOI template, as well as other relevant M&A documents, like a Share Purchase Agreement.
  • Prepare for negotiations: Some negotiation is expected before you sign an LOI and you will likely need to iron out clauses and conditions. Preparing beforehand will help you feel more confident when you enter LOI discussions.
  • Seek advice from an M&A expert: An M&A expert can give you guidance on the M&A process including how to write a good LOI and negotiate with sellers. Browsing an M&A advisor directory is one of the easiest ways to find a professional that suits your needs.

Summary

An M&A letter of intent is one of the first documents negotiated in most M&A deals. It outlines key terms of the deal, improves transparency, and creates trust between the buyer and seller.

A well-written LOI will save all parties time and money and improve the chances of successfully closing the transaction. Its importance should not be overlooked!

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