A Letter of intent (also sometimes called a term sheet, expression of interest, or indication of interest, but collectively referred to as a LOI here) is an informal offer made by a strategic or financial buyer of (or investor in) a business. A LOI is drafted in the preliminary stage of the sale of a business, and can be a useful method for expressing, in plain English and summary fashion, an offer to purchase. LOIs are typically non-binding, which means that, with limited exceptions (the most important of which, exclusivity, is discussed below) either party can walk away at any time, for any reason. The term sheet provides an overview of a prospective buyer’s intentions and sets the stage for what the ultimate definitive agreement will be.
The merger and acquisition process typically, but not invariably, starts with a representative of the seller (an investment banker, business broker or some similar intermediary) approaching a group of potential buyers in writing (that document, a Confidential Information Memorandum) about their interest in some form of a transaction (sale of equity, sale of assets, merger, or investment) with the seller, and giving them basic narrative and financial information about the seller, after the potential buyer has signed a non-disclosure agreement. Most important from the seller’s perspective, this communication invites these potential buyers to make an offer, at a price the buyer determines it is willing to pay. Most times, transaction advisors representing a seller request a LOI as early as possible in the sales process, so that the seller can narrow the number of potential buyers with whom it will engage in continuing discussions.
Stated another way, a term sheet is a prospective buyer’s first volley, expressing an interest in such transaction in writing. A primary purpose of a letter of intent is to suggest a price or valuation range that it such buyer is willing to pay for the seller.
The A LOI typically provides that based on the information you’ve provided us, we’re interested in buying your company and are willing to pay X (or perhaps a price somewhere between X and Y). A LOI is typically delivered after a prospective buyer reviews the Confidential Information Memorandum, if one exists, but prior to meetings with management and initiating any other form of due diligence.
Putting forth a valuation range helps a seller evaluate whether proceeding with a potential buyer makes sense. A term sheet typically proposes other key terms of an offer. For example:
The most critical, particularly to sellers, and legally significant provision, in LOIs is the provision entitled exclusivity (also referred to as a lockup). This provision requires the seller to negotiate only with the potential buyer for a specified period of time, which can range from 30 to 180 days, but is usually somewhere in the middle. It may even require the seller to report any expressions of interest the seller receives from other interested parties to such potential buyer, so it is critical that the seller believes 1) the buyer is a good and likely match for a potential transaction, and 2) the seller is unlikely to receive superior terms from the buyer or another party. While the seller can merely wait for such a time period to lapse before renewing conversations with other potentially interested parties, momentum for a transaction may be lost in the interim, so it is critical the seller feels fairly confident before signing the LOI. This is all the more true since the buyer typically isn’t directly giving the seller anything in exchange for the buyer’s signature.
This article has been updated from May 13, 2019.]
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Peter Feinberg has more than 25 years of experience representing primarily middle market companies in all aspects and many sectors of merger and acquisition transactions. Mr. Feinberg has successfully closed well over 100 merger and acquisition transactions, representing buyers and sellers, public and privately held companies, multinational firms, family-owned businesses, and private equity firms. He…