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The Importance of M&A Documentation - The Letter of Intent

By Generational Equity

Letter of Intent

The critical role that documentation plays in a successful M&A transaction cannot be overemphasized. Indeed, if you want to have a “clean” transaction, one where you, the seller, is protected, documentation that dots the Is and crosses the Ts is critical. 

One of the most important documents that many novice business sellers have no experience with is the Letter of Intent (LOI). So, what exactly is the LOI?

“The LOI is an important step because it lays out the basics of the final deal: the purchase price and terms, closing date, length of exclusivity, approvals, and much, much more. However, the LOI isn’t necessarily the final deal. Rather, it’s the framework or roadmap for that final deal. Based on what each side discovers during due diligence, and/or whether the profits of the company decline, the deal may change.”

Letters of Intent: A Framework for Moving Forward

Essentially the Letter of Intent is a framework for the deal, but what it does most importantly is commit both parties to move forward with the deal exclusively.

As such, the LOI provides the seller with the confidence that the proposed buyer is serious, and likewise the buyer gains the knowledge that the seller is committed to working on closing the deal (assuming all the following steps in the transaction pan out).

It is an important document in the process of selling a business, one that you, as a seller, should require of any and all serious buyers.

Elements of a Good Letter of Intent

Therefore, getting the Letter of Intent right is vital. But to the novice, what is important in the LOI? Here are some general guidelines.

First, although they’re similar in many ways, an LOI is different from an indication of interest (IOI). Both documents are part of the process of buying or selling a company; however, the LOI lays out more specific terms. So, don’t confuse the two. 

An IOI is like asking for a date, while an LOI is a marriage proposal. Although some sophisticated buyers often include significant details in their IOI, it is still incumbent upon the seller to get a formal LOI from the buyer. 

Secondly, exclusivity is a key consideration. An LOI usually includes a lock-up period where the seller is out of the market — that is, unable to speak with other buyers about doing a deal. Sellers should grant exclusivity very carefully and should do everything possible to limit the amount of time they’re prevented from speaking to other buyers. 

This is a key issue to consider when selling a business. Your lockout period means that you will be unable to market your business to anyone else. This can be detrimental given that even a 90-120 day lockout means that any other interested parties will most likely move onto other opportunities during this time frame. 

In addition, once it becomes known that the seller has entered into a Letter of Intent (even if the terms are confidential), if the transaction does not close, the perception may arise that the buyer found something wrong and walked away.

True or not, such perceptions can have an adverse impact on the ability of the seller to find a replacement buyer at the same price. So, be sure that your buyer is truly interested before countersigning any LOI.

Professional Guidance for Your Letter of Intent is Key!

This points out what we have said several times in these postings: Hire an M&A advisor to guide you through the complicated process that any exit can (and will) be.

Most likely you will only exit one business in your professional career. Learning “on the job” regarding how to effectively do this can have a huge negative impact on you, your family, and your financial legacy. 

Most buyers that you want to be in negotiations with are what we call “professional buyers,” the kind that make several acquisitions annually and are very experienced and knowledgeable about how to buy companies to their benefit (ROI), not yours.

Before you sign a proposed Letter of Intent, have your M&A advisor and M&A attorney review it closely so that it is detailed enough to protect you and your interests. Since most LOIs are drafted by the buyer, this is critical. 

This is how our friends at Smith, Gambrell, & Russell LLC put it in a recent article:

“For a seller, the letter of intent often provides the point of maximum negotiating leverage to insert a few phrases or sentences that can make a material difference in the overall transaction. Experienced professional advisers have a highly useful role to perform, and a wise seller will take full advantage of this important opportunity to maximize its strategic transaction position and thereby put more dollars in its pocket.”

As you approach your exit and consider all the documents you will need to create/approve/sign, be sure that any LOI you sign is crafted with protections for you as the seller. Since you will be effectively taking your company off the market for a period time, given the risks and ramifications, be sure the LOI you countersign has safeguards protecting you.

Bottom-line: The M&A process is extremely complex. The LOI is just one example of something you need to know about how to exit your company for maximum profit. 

The good news is that we offer a way to learn more. Our complimentary exit planning conferences are led by seasoned, experienced M&A professionals, many of whom have successfully sold multiple companies during their careers. I would advise any business owner who is contemplating an exit in the next 1-5 years to attend one of our conferences to learn how to prepare for the complexities associated with your eventual exit.

Interested in learning more? Use the following links to discover how you can use our services to prepare you for what you need to know about a successful exit (and the documentation critical to this process):

By Carl Doerksen, Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC. All Rights Reserved.

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Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.
Pete L.
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!
Eric Erlandson, Owner, Action Fastenings, Inc.
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).
Bil MacLeslie, CEO, ipHouse
We had the pleasure of working with Mr. Ahmad Behjati Managing Director, M&A, for Generational Equity during our acquisition of Papa's Dodge in late 2021. Generational Equity and Mr. Behjati represented and marketed Papa’s Dodge. As our primary contact, Mr. Behjati was professional in every facet of this acquisition process, conveying valuable advice most times and assisting us in every step of the process.
Rick Greene of Dobbs Equity Partners LLC
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.
Bil MacLeslie, CEO, ipHouse
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.
Ralph Noblin, President of Noblin & Associates
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.
Andy Graham, Vice President, Modern Heating & Plumbing
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.
Jay Dinnison, Owner of Sharpe Mixers
After attending a conference with GE, I decided that the value they bring would be worth the expense and as soon as I started working with them, I realized that was the right decision. When we started to get LOIs, Fred Zweifel took the lead on the communication and supported negotiations throughout the process, which got tricky as we moved forward. I learned that it can be common for companies to make a great offer then work to erode that price with their discoveries, but Fred and the GE team kept that from happening.
Caroline Connelly, CEO, OptoTest
We thank you Eric and Generational Equity making our dream come true.
Larry Moore, Owner, A Company Portable Restrooms
Through the sale process, Generational brought in several interested buyers and we closed in about 6 months. I am so glad I accepted that invitation to the conference and could not be happier with the whole process. The team at Generational coupled with their knowledge and guidance was so valuable that in the end, I know I could never have done this on my own!
JoAnn Ellis, Owner of Fondren 5 Star Kennels
I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.
Robert Evans, President and CEO of Mealtracker Dietary Software
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.
Terry D. Wickman, President, Keytroller
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
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Jay Dinnison, Owner of Sharpe Mixers
I wanted to take this opportunity to thank you for all that you have done for us. Not only did you take care of all the aspects of the sale but took extra care to make sure we knew what it looked like every step of the way. I will definitely recommend your company to anyone that is in a position to or looking to exit their business.
Shane and Johanna Kline, Owners of Vision Upfitters
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.
Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Terry D. Wickman, President, Keytroller
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.
Robert Evans, President and CEO of Mealtracker Dietary Software
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.
Larry Moore, Owner, A Company Portable Restrooms
The professionals at Generational Equity then helped develop a roadmap for enhancing the value of the firm and an evaluation report. This was completed by June 14, 2021. We then developed the Confidential Information Memorandum and put Taylor Studios, Inc. on the market by July.
Generational Equity’s professional staff helped me every step of the way. Their network and professionals are the only reason I sold my company this quickly. For me this is a once in a lifetime sale and I was unfamiliar with the process. I was able to lean on them with questions and concerns.
Betty L. Brennan, President, Taylor Studios
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.
Bryan D. Horn, Owner, Over Under Clothing
The most important contribution I think Ahmad made was with his personality and work ethic. He is sincere, efficient, and very hard working. He was available to me at all times, whether it was for specific detail of the negotiation or just to talk through the bigger picture. He listened, advised, and recommended, but never forced his idea or opinions. In the time we worked together, he became a valued colleague and also a friend.
Salvo Stoch, Founder and CEO of Sleeping Partners
Generational Equity’s assistance was invaluable in compiling and marketing our business.
Bil MacLeslie, CEO, ipHouse
We were represented by Michael Goss with Generational. The due diligence was grueling and exhausting, but Michael propped us up and kept us motivated throughout the process. Debi and I continued to ask each other how we could possibly make it through this process without the assistance of Michael. Michael's professionalism and knowledge is absolutely amazing, and we are so blessed to have had him by our side as we made our future dreams come true.
Bob and Debi Lee, Owners of BL Technology, Inc and BL Tl Services, LLC
I decided to attend the conference and hopefully receive some guidance on how to structure an exit plan of my business. Upon arriving at the conference, I was so impressed with the presentation given by Generational Equity that I set a future appointment that week to discuss the possibility of selling my business with their Senior Managing Director David Robinson.
JoAnn Ellis, Owner of Fondren 5 Star Kennels
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Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
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Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
Thanks to you, the entire GE team and especially Michael Goss for driving a great valuation, coaching me and driving the process across the finish line. Please let me know if there is anything I can do to support GE going forward. P.S. Given my experience with GE I felt comfortable enough to sign up with Generation Wealth Advisors!
Tom Currier, Former President & CEO, Rackmount Solutions