CHAPTER 16 The Offer Flashcards
(15 cards)
What is the purpose of a Letter of Intent (LOI) in a business acquisition?
It outlines the proposed deal terms, including the price and key conditions, and serves as a mutual agreement before proceeding to a binding purchase agreement.
Is a Letter of Intent (LOI) legally binding?
Mostly no, but it includes legally binding terms related to exclusivity, confidentiality, and nonsolicitation.
Why is exclusivity in the LOI important to the buyer?
It ensures the seller negotiates only with the buyer while they invest time and resources in due diligence and financing.
What are the key deal terms typically included in an LOI?
Offer price, transaction structure, seller debt, working capital peg, closing timing, non-compete period, confidentiality, and nonsolicitation terms.
What is a “working capital peg”?
It’s the agreed amount of working capital that must remain in the business at closing.
What are three approaches to handling the working capital peg in an LOI?
(1) Set a specific dollar amount, (2) defer discussion to the purchase agreement, or (3) include a formula for calculating the peg.
Which approach to the working capital peg is recommended and why?
Using a formula without a specific amount is recommended. For example, peg will be equal to the average net working capital over 6 months prior to the LOI.
What are the disadvantages of a highly detailed LOI?
It can overwhelm or alienate the seller, especially if they are inexperienced, and potentially harm the buyer-seller relationship.
Why might delaying the working capital peg discussion until the purchase agreement stage be risky?
It may cause delays, misunderstandings, or even derail the deal if the seller feels the deal is being renegotiated.
How long is a typical LOI and how does it compare to the final purchase agreement?
An LOI is typically about 4 pages; the final purchase agreement is around 40 pages.
What should you do if you’re not confident in your LOI’s legal terms?
Have an attorney review it before sending it to the seller.
What are the possible seller responses to an LOI?
(1) No response, (2) counteroffer, (3) more info to justify higher value, (4) acceptance with minor changes.
What is the danger of making the LOI too easy for the seller to sign?
It may lead to difficulties closing the acquisition later due to unresolved or poorly defined terms.
What prior document often overlaps with the LOI?
The Indication of Interest (IOI), which is a less detailed initial offer.
What should be your mindset when issuing an LOI?
Be prepared to complete the acquisition on the terms stated in the LOI.
