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Why Letters of Intent Matter

By Generational Equity

Signing Letters

Over the years of publishing these M&A pieces, we have discussed how important key documentation is for business owners seeking to complete an M&A event, especially if they are not using the advice of a professional M&A firm like The Generational Group. Some of the key documents we have discussed include:

Today we are going to cover a document that you may not even be aware of unless you have gone through an M&A transaction. The letter of intent (LOI) is vital to completing a transaction. Our friends with Axial (a leading online resource that combines capital providers with business owners) have produced a comprehensive piece on LOIs. This is how they describe the importance of this document:

LOIs set procedures for due diligence … An LOI can be used to set expectations around deal structure, scheduling, and other big picture deal points. Material terms that are essentially deal-breakers can be resolved early.

It is this last sentence that demonstrates the importance of an LOI. Resolving key items via the LOI can prevent deals from collapsing later when unforeseen issues arise. So, your logical next question is: What are material items and how can I determine them in advance? Ah, now you see that is a huge challenge to the uninitiated and a good reason to hire an M&A professional to represent you.

Until you close a few dozen deals and have literally seen nearly every possible “material term,” you will have a hard time anticipating them. Furthermore, if you are negotiating with a savvy, professional, experienced buyer, he/she will most likely craft an LOI that protects their interest more than yours. Is this wrong? No, it is simply a reality. Buyers are going to pay attention to details that impact them, so you need to do the same in the LOI, ensuring that your interests are covered as well.

Security for All

In essence, an LOI can be used like Switzerland is for banking: a neutral document that can protect both parties. Again, Axial describes it this way:

LOIs help protect all parties in the deal. In order to prevent a bidding war, or to allow the buyer an exclusivity period in which to conduct its due diligence, an LOI can include a “no-shop” clause that prohibits either or both sides from approaching third parties for a limited period of time. Likewise, in order to protect a seller from wasting time, money and effort, an LOI may include a break-up fee that is paid if the buyer cancels the transaction for an unpermitted reason.

You may be tempted to balk at the notion of any sort of fee to be paid if you back out a transaction. However, the key word above is “unpermitted.” Again, if you have never completed a transaction, you are most likely completely unaware of what some of these reasons may be. This is another reason to spend some money in advance and hire an M&A advisor.

There are certainly valid reasons for sellers to cancel a transaction. However, savvy buyers know that these reasons can be limited and strict in detail. You need to be sure that you are very comfortable with the terminology and verbiage used in your LOI relating to break up fees.

Momentum is Key

Finally, a well-executed LOI can not only protect both parties, it can also, in the long run, speed the velocity of a deal up:

LOIs are considered formal legal documents. It is important to differentiate between what parts of an LOI are intended to be enforceable, and what parts aren’t. Examples of enforceable sections include clauses around confidentiality, no-shop, or break-up fees. Although price and terms typically wouldn’t be included among the enforceable provisions, they set an expectation that is difficult to change absent a good reason.   If the circumstances of the deal warrant, an LOI can be a valuable tool to save time and money.

There is an old saying in deal making that goes something like this: The longer a deal takes to close, the more the odds go up of something unforeseen happening to scuttle it. So, having a well-thought-out LOI can help both parties close a transaction faster than not having one at all. Again, if you hire an experienced deal maker, the odds are good that he or she will be able to help you anticipate material issues that might arise in advance and thus save a transaction from failing if something does come up out of the blue at the 11th hour.

A good analogy for this is that you see your family physician annually for a physical and you go to a specialist to treat any condition outside of your GP’s practice. The same is true for the eventual sale of your largest asset. Don’t go cheap and try to do it yourself because you will encounter key documents that you have no experience with (such as an LOI) and that may lead to not only you leaving chips on the negotiating table, but it also could lead you to agree to the terms of an LOI that are not in your favor.

My suggestion, if you are considering entering the market on your own, is to first attend a Generational Group exit planning seminar. We hold these no obligation, educational meetings throughout North America for business owners who are interested in learning how and when to exit for maximum profit. Follow these links to learn more:

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

© 2021 Generational Equity, LLC. All Rights Reserved.

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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
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Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.
Jay Dinnison, Owner of Sharpe Mixers
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
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
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.
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Bil MacLeslie, CEO, ipHouse
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Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
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Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
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Larry Moore, Owner, A Company Portable Restrooms
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Eric Erlandson, Owner, Action Fastenings, Inc.
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Bil MacLeslie, CEO, ipHouse
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Betty L. Brennan, President, Taylor Studios
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JoAnn Ellis, Owner of Fondren 5 Star Kennels
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
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JoAnn Ellis, Owner of Fondren 5 Star Kennels
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