In the world of business, mergers and acquisitions (M&A) are not just transactions but strategic decisions that can redefine the future of the companies involved. Welcome to Part 3 of our series devoted to the importance of process through the complexities and nuances of M&A.
While the economic terms and transaction structure are crucial, the process followed to get to the closing is often misunderstood or overlooked. This series aims to offer a deeper understanding of the M&A process in middle-market and small-market deals and its impact on both buyers and sellers. A well-planned and executed M&A process contributes to a smooth and efficient transaction, maximizes value for sellers, and ensures a seamless transition and future growth. Conversely, a poorly executed process can lead to misaligned expectations, value deterioration, and operational inefficiencies.
Join us as we explore each stage of the M&A process, from assembling a deal team to post-closing deliverables. Stay tuned as we roll out the rest of our series in the coming months ahead.
- Part 1 – The Importance of Process: Crafting Success in M&A Transactions
- Part 2 – The Art of NDAs, Initial Discussions, and LOIs
- Part 3 – The Power of Letters of Intent and Term Sheets in M&A
- Part 4 – Bringing it Home: Negotiating the Deal Documents
- Part 5 – The Last Lap: Strategies for a Smooth M&A Closing Process
- Part 6 – After the Ink Dries: Understanding Post-Closing Deliverables
Part 3: The Power of Letters of Intent and Term Sheets in M&A
In part 1, we discussed the initial steps both buyers and sellers take by assembling their respective deal teams, and in part 2 we walked through initial contact between the parties. In this post, we take a look at letters of intent (LOIs) and term sheets and their importance. For simplicity, we’ll lump both together under the term LOI.
Entering into an LOI is a critical step in M&A transactions. Despite being largely non-binding, these documents set the stage for the terms of the definitive deal documents; they outline the key terms of the transaction, such as the business valuation, purchase price, payment structure, transaction structure, certain important legal terms, due diligence process, and post-acquisition plans. The few legally binding provisions typically include confidentiality obligations and no-shop provisions.
In addition to key deal terms, a well drafted LOI should include the assumptions the buyer is making in arriving at the valuation of the acquisition target. This is important for setting expectations between the parties, and if both sides understand the basis for the valuation it will lead to less friction if those assumptions turn out to be incorrect, and the buyer is forced to alter the purchase price.
One of the most important benefits to the LOI process is that true deal breakers are typically identified at this early stage, before either side has invested significant time and resources towards pursuing the transaction.
It’s important to include both legal counsel and tax advisors at this stage in order to propose a transaction structure that will meet both the buyer’s and the seller’s requirements and to be certain that all key deal terms will be included in the LOI. Employing a DIY approach can lead to a host of problems, including completely starting from scratch after the parties believed they had an agreement in principle.
In an auction process, the investment banker or broker may solicit LOIs from all suitors, or if it has already solicited Indications of Interest, it may only request an LOI from a small number of finalists or the chosen buyer. In any event, only the buyer that is chosen by the seller will actually sign an LOI with the seller.
Once the LOI is signed, activity picks up significantly on both sides. Due diligence requests are sent to the seller’s team, and a virtual data room is established and the seller’s team begins to populate it with due diligence materials. While this is occurring, buyer’s counsel begins drafting the purchase agreement. In addition, non-legal due diligence streams begin.
LOIs and term sheets are not just preliminary documents. They are critical negotiation tools that lay the foundation for the final purchase agreement. By setting out the main terms of the deal and the expectations of both parties, they guide the negotiation process and keep both parties aligned on the transaction’s key aspects. Next time we’ll delve into due diligence and the initial drafts of the primary transaction documents.
About The Author: Vaughn Marshall
For more than 10 years, Vaughn Marshall has served businesses, founders, and investors by providing strategic solutions and a comprehensive approach to their corporate legal needs. Drawing upon a diverse background, including both a J.D. and an M.B.A., he helps clients navigate complex issues with practical solutions while keeping sight of the big picture. He brings this unique perspective to all of his practice areas, including corporate law, mergers and acquisitions, securities, , and general transactional matters. Vaughn joined Doida Crow Legal in 2016 and was named Partner in 2022. He is committed to problem-solving instead of merely identifying roadblocks in order to cultivate an exceptional client experience. He has experience representing clients in a wide variety of industries, including telecom, construction services, manufacturing, legal cannabis industry, IoT, SaaS, and hospitality. Prior to joining the firm, Vaughn was in house counsel at an established private equity firm in the Denver metro area where he worked closely with the firm’s management and portfolio companies on a wide range of transactions both across the country and internationally.
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