M&A Deal Points | The LOI
How to Evaluate Letters of Intent (LOIs) in Sell-Side M&A Transactions
Evaluating Letters of Intent (LOIs) is a critical step in any sell-side M&A process. For sellers, choosing the right bidder can set the tone for the rest of the transaction, especially since most buyers will request exclusivity. Here are the key factors to consider when assessing LOIs:
1. Deal Structure
The structure of the deal—whether it’s an asset purchase, stock purchase, or merger—has significant tax, legal, and operational implications. Sellers should fully understand how the proposed structure will impact them post-sale.
2. Purchase Price and Payment Terms
A headline purchase price isn’t the whole story. Payment terms, such as earnouts, seller notes, rollover equity, and working capital adjustments, can significantly affect how much of the purchase price actually makes it into the seller's hands. In some cases, a lower offer with more favorable terms and payment certainty may be a better choice than a higher but riskier bid.
3. Exclusivity
Most buyers will request exclusivity to conduct due diligence and negotiate the definitive agreement. Sellers should carefully review the exclusivity period and any extension mechanisms to ensure they aren’t locked into a stalled or unfavorable process.
4. Timeline and Milestones
A detailed timeline with clear milestones—such as due diligence completion, agreement signing, and closing—helps set expectations and keeps the deal on track. A realistic and well-communicated timeline is essential for maintaining momentum.
5. Closing Conditions
Sellers should scrutinize the conditions required for closing. Fewer "outs" for the buyer generally indicate a stronger LOI. Pay special attention to conditions tied to regulatory approvals, due diligence findings, or financing.
6. Financing
If the buyer’s offer is contingent on securing financing, assess their ability to obtain it. A financing condition introduces uncertainty, so understanding the buyer’s financial stability and funding sources is crucial.
7. Ability to Close
Evaluate the buyer’s overall capacity to complete the transaction. Consider their resources, track record, and ability to navigate due diligence, negotiate terms, and finalize the deal.
8. Legacy and Culture
For many sellers, ensuring their legacy is preserved post-sale is just as important as financial considerations. Assess whether the buyer aligns with the seller’s values and is committed to upholding the company’s culture and reputation.
9. Employee Security
Employee retention and fair treatment are critical concerns for many sellers. Determine if the buyer plans to retain employees and if they’ll offer competitive compensation and benefits.
Pro Tip: Use a Bid Matrix
When comparing LOIs, create a bid matrix that summarizes each bidder’s position on these criteria. Assigning weighted scores can help clarify the pros and cons of each offer. Keep in mind, though, that selecting the right bidder is often a qualitative process as much as a quantitative one.
Evaluating LOIs is a blend of strategy, analysis, and intuition. By carefully considering these factors, sellers can select the bidder that offers the best overall fit for their goals and priorities.