Terms and Conditions in an M&A Letter of Intent
The letter of intent (LOI) lays the foundation for the M&A deal as it moves forward. Here are some of the sections you should make sure you include in a LOI as part of any deal:
M&A LOI: Due diligence and timing
Due diligence is the inspection period for Buyer. It comprises a short section, perhaps just a single sentence, in the LOI where Buyer indicates how long he needs to complete it. After Buyer successfully concludes due diligence, he can close the deal.
Sellers should pay close attention to the length of time Buyer seeks; if it’s too long, Seller shouldn’t proceed until Buyer agrees to conduct due diligence and close the deal in a shorter, more reasonable amount of time. As a guideline, Buyer should be able to conduct due diligence and close within 60 days of signing the LOI.
M&A LOI: Approvals and conditions
This section is usually more boilerplate where the Buyer may reference certain executives who need to sign off on the deal before it can close. Buyer may also ask Seller to make sure her ducks are in a row, so to speak, so that whoever needs to approve the transaction on her side is willing to do so.
As with a financing contingency, Sellers shouldn’t move forward with an LOI if a Buyer is including what amounts to an approval contingency — that is, a hedge for the Buyer to back out of the deal simply by claiming some executive won’t agree to the deal. Make sure closing the deal isn’t contingent upon the Buyer gaining approval of some yet-unseen executive.
M&A LOI: Role of management
An LOI may define the expected role of the company’s management after the deal closes, including Buyer’s intent to retain certain employees in the current roles and at their current compensation levels.
Sellers should be on guard against an LOI that includes a well-meaning but potentially destructive clause where Buyer won’t move forward unless he can sign certain employees to employment contracts and noncompete agreements.
This practice can become tricky because if an employee realizes she can hold up the deal and prevent it from closing, she may dig in her heels and make outsized demands. Don’t let an employee hold up the process of closing a deal.