How to Choose the Right Bidder in a Sell-Side M&A: Evaluating LOIs

One of the most exciting and important points in a sell-side M&A process is evaluating LOIs. So, how does a seller select a bidder, knowing that most will require exclusivity moving forward?

▪ Deal Structure. Evaluate the proposed structure of the deal (for example, asset purchase, stock purchase, merger, etc.) and its implications for tax, legal, and operational aspects of the transaction.

▪ Purchase Price and Payment Terms. Evaluate the purchase price, the working capital peg and any adjustments, earnouts and other contingent payments, seller notes, and rollover equity. Payment terms, such as the timing of payments, form of payment, and any escrow or holdback provisions for indemnification claims, should also be assessed. Sometimes, a lower price with higher payment certainty is preferable to a higher top-line purchase price with less payment certainty.

▪ Exclusivity. In exchange for the time spent and costs incurred in connection with diligence and agreement development, most buyers will ask for exclusivity. The buyer should assess the time period for the "no-shop," as well as the mechanics of any extensions. Ideally, the time period can be used by the seller to move the process forward quickly and then re-engage with other bidders without losing too much momentum if the LOI buyer doesn't work out.

▪ Timeline and Milestones. A clear timeline, including key milestones, such as the completion of due diligence, signing of the definitive agreement, and closing date, helps set expectations about moving the transaction forward.

▪ Closing Conditions. They can include regulatory approvals, board approvals, satisfactory completion of due diligence, financing for the purchaser price, and any other specific conditions relevant to the transaction. For the seller, the fewer "outs" for the buyer, the better.

▪ Financing. Is there a financing closing condition, and if so, how likely is it that the buyer will be successful in obtaining financing?

▪ Closing. Is this a buyer that can close? This goes beyond closing and financing conditions, but holistically to the buyer's ability to complete diligence in a timely manner, negotiate the definitive documents, finance the purchase price, and get a deal done.

▪ Legacy and Culture. Will the buyer continue the seller's legacy? Will the buyer's and seller's culture integrate without conflicts?

▪ Employee Security. Does the buyer intend to retain the seller's employees and treat them fairly?

For middle market companies, the last two points are often as or more important than the others.

In assessing bids, it's helpful to prepare a bid matrix, summarizing each bidder's position on pertinent criteria and assigning weighted scores. Even so, it's important to keep in mind that LOI evaluation is often more of a qualitative art than an quantitative science.