19 Nov Why as a Business Seller You Want a Customized Front-Loaded Letter of Intent
As a business seller, you want a customized front-loaded letter of intent or LOI. By having a customized front-loaded LOI, containing your ideal deal structure and terms and conditions, you substantially increase your ability to get your ideal sale transaction outcome.
As a seller, you are strongest and have your most negotiating leverage early during the LOI stage of your sale transaction. By learning early if a buyer can give you what you want, you can save a significant amount of time and money. Also, you can use your customized front-loaded LOI in an auction of potential buyers to get them to compete in giving you your best possible transaction terms. Competition tends to get buyers to offer better purchase prices and deal terms.
Obviously, you need to have your customized front-loaded LOI prepared, and to make use of it BEFORE you grant any potential buyer exclusivity or begin negotiations. At a bare minimum it should contain the following four (4) key points:
- Price. You can leave a blank in brackets for a potential buyer to complete. Do not assume you know the value of what buyers may offer, especially if they are competing with each other. You can decide later if the amount offered is too low.
- Cap. A “cap” is a limit (absent fraud) on the percentage of the total purchase price that the buyer can potentially “clawback” in the event of a breach by you of any of your representations and warranties in the definitive sales agreement. The actual cap percentage you get varies in part based on what you request, your industry, the current market, your negotiating strength and other factors such as the experience, skill and tenacity of your M&A counsel.
- “Basket”. The “basket” is the aggregate dollar amount of claims the buyer must have, based on alleged breaches by you of your representations and warranties in the definitive sale agreement, before the buyer can request indemnification from you for damages the buyer sustained (i.e., a “clawback” of a portion of the purchase price you received). Basket terms vary.
- Survival Period. This period is how long your representations and warranties in the definitive sale agreement last, after which time the buyer cannot make a claim against you for an alleged breach of those representations and warranties in an effort to potentially “clawback” a portion of the purchase price.
These four (4) points represent, typically, 70-80% of the material points of your sale transaction.
Other Deal Points to Front-Load. You should add to your customized front-loaded LOI as many other deal points as you want, such as somewhat detailed indemnification provisions, purchase price escrow amounts and periods (if any), employment and/or consulting agreement terms and conditions, and so on. Learning what a buyer is willing to offer you at the LOI stage will inform you early if it is worth continuing discussions, and will reduce negotiating time later when you are discussing and negotiating with your selected buyer the definitive sales agreement.
In summary, having your M&A counsel assist you to prepare a customized front-loaded LOI early, when you as a seller are strongest and have the most negotiating power, will save you both significant time and money and substantially increase your ability to get your ideal sales transaction outcome.