M&A Series, Part 3: The Handshake Deal: Letters of Intent

M&A Series, Part 3: The Handshake Deal: Letters of Intent

This is part 3 of 6 of Stock Legal's "Mergers and Acquisitions" blog series. For part 2 of 6, please click here

            Once you’ve reached the point in your sale process where you’ve narrowed to one potential buyer who has received some information under the protection of a confidentiality agreement, the next step is to negotiate and execute a letter of intent.  This step can take as little as a few days, and as much as 2-3 weeks to negotiate.  The ease or pain of the negotiation of a letter of intent is very deal-specific, and can be affected by the parties’ personalities, how top-of-mind the deal is for each party, and whether the parties have previously been discussing the business terms of the sale with any specificity.

            One mistake both buyers and sellers often make is to hesitate at this stage on whether to bring in their attorney.  We always counsel our clients that we can be as involved as they’d like, but to always run letters of intent by us prior to execution.

           Since letters of intent are non-binding in most respects, and contain primarily “business” terms, clients tend to believe that their lawyer won’t add value and might slow down the transaction.  At Stock Legal, this couldn’t be further from the truth.  We know that delays are costly, but an attorney’s review of a letter of intent is rarely a time-consuming task, and can save clients from potential stress, confusion, or re-trading later in the deal. 

          Transactions have a certain code of conduct that parties typically follow, and it’s unfortunately not written in a rulebook.  Over time, I’ve seen the consequences of a party’s failure to follow the code of conduct, and it often results from a party’s break from the terms of the letter of intent.  Although non-binding, parties usually hold strong and fast to the letter of intent as representative of their “handshake deal.” 

This is why it’s so important to build in the necessary flexibility and to make sure the agreements made in the letter of intent are those that a seller can live with.

            Though letters of intent vary in length and detail, we usually expect that a letter of intent will answer some basic questions about the transaction.  Will the buyer buy assets, or stock?  What will the purchase price be, is there room for adjustment based on the diligence process, and how will it ultimately be paid (up front, pursuant to an earn-out, or via promissory note)?  What will the due diligence process be like?  Will the seller be restricted in certain ways from competing or soliciting former employees? Will the buyer offer the seller a consulting or employment agreement for after closing? Will the potential transaction be exclusive between this buyer and this seller for a period of time, and if so, what amount of time?

             While you’re negotiating your letter of intent, you can also begin to turn your attention to the next phase of the deal: due diligence.  Gathering and organizing information about your business (such as contracts, organizational documents, or intellectual property information) while you’re not under the pressure of a buyer’s ticking exclusivity clock is a great way to think ahead of the game.

If you’re considering a transaction and want more information or legal counsel, feel free to reach out to us! We’re prepared to meet your timeline and assist you in the sale of your company.

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