In the high-stakes realm of mergers and acquisitions, the Letter of Intent (LOI) is far more than a preliminary formality — it’s the strategic linchpin that charts the course for a successful transaction. At Taft, the firm’s corporate attorneys are skilled at guiding clients through the intricate nuances of this pivotal document. Below is a high-level exploration of some of the essential components of a LOI, along with insights on how to craft and negotiate each element with strategic acumen.

1. Preamble: Setting the Scene

The preamble frames the deal and aligns both parties’ expectations. It introduces the key players, outlines the nature of the transaction, and delineates the parties’ overarching objectives. Though seemingly straightforward, this section is critical in establishing a coherent framework and aligning expectations early.

When representing the buyer, it’s imperative that the preamble unequivocally defines the type of acquisition: asset purchase, stock acquisition, or a merger. Is an entire company being bought, or is this a carve-out of a specific business line or entity?

2. Purchase Price: Defining the Value

The purchase price is often the focal point of discussions as it encapsulates the economic essence of the deal. It’s often advisable to articulate the price and provide a transparent rationale for its determination. Is the valuation based on multiple EBITDA, a recent fundraise, or otherwise?

The LOI should clarify whether the price is fixed or subject to adjustments contingent on due diligence findings or closing working capital adjustments. There are also concepts like earn-outs or contingent payments that come into play, offering the seller the potential for additional compensation based on post-transaction performance metrics over a defined period of time. Achieving a balance between specificity and flexibility is crucial — securing a fair price while retaining room for necessary adjustments.

3. Payment Terms: The How and When

Payment terms, closely related to the purchase price, deserve their own distinct discussion due to their inherent materiality and complexity. Will the payment be structured as a lump sum, series of installments, promissory note (subordinated or not), or a mixture of cash and equity?

For sellers, negotiating a larger upfront payment can mitigate risk exposure, while buyers might favor a staggered or deferred payment structure linked to achieving specific post-closing milestones. This section also encompasses provisions for escrow accounts or holdbacks to ensure adherence to deal terms and company representations. The art of negotiating payment terms lies in aligning financial strategies with both parties’ risk tolerances.

4. Due Diligence: Unearthing the Details

The due diligence clause is the investigative component of the LOI, detailing the buyer’s right to conduct a comprehensive examination of the seller’s business. This encompasses a buyer review of financial statements, legal contracts, intellectual property, physical assets, real estate, and other critical elements. The scope and timeline for due diligence must be meticulously defined to avoid any future ambiguities and give both sides proper time to procure and review all items.

Discovering hidden liabilities or underperforming assets might necessitate a renegotiation of the purchase price or even an exit strategy. Crafting a thorough and precise due diligence clause is essential for safeguarding against unforeseen risks.

5. Confidentiality and Exclusivity: Protecting the Process

Confidentiality clauses are indispensable in protecting sensitive information exchanged during negotiations. Without these safeguards, a seller risks disclosing critical business insights to a prospective buyer who may ultimately withdraw — and who could even be a competitor.

Exclusivity clauses, or “no-shop” provisions, prevent the seller from pursuing alternative offers while the buyer undertakes due diligence and spends time and money. These clauses are designed to protect the buyer’s investment in time and resources. It’s crucial to negotiate the duration of exclusivity carefully — long enough to complete due diligence but not so protracted as to disadvantage the seller.

6. Binding and Non-Binding Provisions: Knowing the Limits

A LOI typically encompasses both binding and non-binding provisions. While the broader transaction terms are usually non-binding, certain elements — such as confidentiality, exclusivity, payment of expenses, and governing law — are generally binding. Clearly delineating which provisions are binding is critical to avoid potential disputes.

7. Termination Clauses: Planning the Exit

Termination clauses delineate the circumstances under which the LOI (and exclusivity) can be dissolved, such as unsatisfactory due diligence results, regulatory scrutiny, or failure to secure financing. Think of this section as a contingency plan — a safety net that, while not always utilized, is crucial for managing deal complexities.

Conclusion: The Starting Line, Not the Finish

A LOI is a foundational framework that sets the stage for all subsequent negotiations and agreements. By meticulously crafting and negotiating each section with strategic foresight, a smoother transaction process can be facilitated and interests robustly protected.

This article was published in Crain’s Cleveland Business on Jan. 13.