What is a Letter of Intent? Part 2 of 3: Structure

LOI listIn the first part of this series, we focused on the purpose of a LOI (Letter of Intent).  In this article, we’re going to outline a basic structure of one.

Long form or Short form?

A LOI can be short or long form, and there are advantages (and disadvantages) to both.  A short-form letter will usually focus on price, a few key terms, the length of escrow, and an exclusivity period.

It will be easy to negotiate precisely because it’s short.  The obvious downside is that it leaves some important issues to be resolved down the road.

On the other end is a long form LOI, which will often contain some “legalese.”  These make sense in complex deals because issues that can be deal breakers are identified ahead of time, before diligence and other time-intensive activities.

The major disadvantage is that in identifying some of these key issues so early on, both parties can get bogged down in deal points before the process has even begun, and so momentum is slowed, or in some cases, stopped entirely.

What an LOI must have:

  1. Price and consideration.  Will the purchase be all cash, or will it be in stock?  Will there be an earnout?  A promissory note?  A hybrid which includes all of the above or something entirely novel?
  2. Structure.  Is this an asset purchase, or purchase of shares?  Will this be a merger?  This is very important for tax purposes.
  3. Timeline.  When is this deal expected to close?
  4. Exclusivity.  This means that buyer has a certain period during which no other potential buyers can be going through this process.  This might also include a stipulation for how/when a seller can terminate exclusivity.
  5. Access.  The buyer is going to want access to employees, books, and records for due diligence purposes.  If the sale is being kept from your staff, you will need to structure a way for the buyer to gain the information he/she needs regarding your employees, as well as an explanation to the buyer of the reason for the secrecy.
  6. Prohibitions.  Anything that the seller may not do between the time the LOI is signed and closing, which could include selling real estate, fixtures, or firing key personnel.
  7. Encumberments.  Are there any third parties to be considered?  This could be leases, copier rentals, or key vendors that are part of the critical path of your business.
  8. Conditions for closing, as well as stipulations for how the acquisition agreement/process can be terminated.
  9. How disputes will be handled and in what jurisdiction.
  10. Deposit, if any.  If this is part of the LOI, it should stipulate that such a deposit be paid into an escrow account, typically a third party.  It simply will make things easier if things don’t conclude in a sale.

This list is not meant to be comprehensive, and some LOIs may exclude some of these or add others. What’s key is for you to see what we stated in our first article in this series.  The LOI is an outline of where the deal is going to go. It’s a roadmap and there’s every reason for the buyer and seller to take their time to agree on what this map looks like so that both parties can reach their desired destinations: sale and liquidity event.  

In the final part of this mini-series, our brokers will share some stories “from the trenches” regarding LOIs in deals they’ve done.

Apex is actively looking for Advisors to join our team. If you or someone you know would like to learn more, contact Doug Hubler at dhubler@kcapex.com or 913-433-2303.