A Letter of intent (LOI) (also sometimes called a term sheet, expression of interest, or indication of interest) is an informal offer made by a strategic or potential buyer of (or investor in) a business.
Regardless of its name, 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.
Think of the LOI as akin to a father asking his daughter’s date, “What are your intentions with my daughter, young man?” but doesn’t have to be that intimidating. The term sheet provides an overview of a prospective buyer’s intentions and sets the stage for what the ultimate definitive agreement will be.
A LOI may sound like a teaser, and in some ways it is except that whereas a teaser is created by a seller (or a seller’s intermediary), a LOI is created by the buyer. Essentially, the LOI is the buyer’s teaser.
Stated another way, a term sheet is a prospective buyer’s first volley, expressing an interest in writing. A primary purpose of a letter of intent is to suggest a valuation range that a prospective buyer is willing to pay for a company.
A LOI typically provides something to the effect of: Based on the information you’ve provided us, we’re interested in buying your company and are willing to pay a price somewhere between X and Y.
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:
A LOI may also detail the conditions for negotiating the deal, including whether or not the potential buyer desires “exclusivity” during the early negotiation process.
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.
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.
As stated above, the terms “term sheet,” “expression of interest,” “letter of intent,” and “indication of interest” are commonly used interchangeably. However, there are sometimes subtle differences in the way these terms are applied. A letter of intent, for example, is more likely to be issued by a prospective buyer a little bit later than would be a mere expression of interest. It is also more likely to include binding provisions, such as a grant of exclusivity to the prospective buyer. However, these are merely generalizations.
There are a number of things you should consider before you sign a letter of intent. To read about them, please see When Should a Seller Sign a Letter of Intent and The Letter of Intent – In Detail. Learn more about selling your business from the expert faculty of Financial Poise in our webinar, “Legal and Practical Advice-Roadmap to Selling Your Business.”
[Editor’s Note: If you want to read more about how to sell or otherwise exit a business, be sure to read “Business Transition and Exit Planning: Welcome to the Jungle!” It will lead you step-by-step through what you need to know.]
No author bio available. Check LinkedIn for more information.
Session expired
Please log in again. The login page will open in a new tab. After logging in you can close it and return to this page.