Keith McAslan, Partner, CxO To Go

Introduction:

One of the first steps in the merger and acquisition process after executing a confidentiality agreement or non-disclosure agreement is the non binding letter of intent.  A letter of intent, commonly referred to as the LOI, is a document that is given to express the interest to take the next steps in a transaction, such as to purchase or merge a business. 

An LOI is a nonbinding agreement that not only expresses interest, but typically details the initial terms for the contemplated transaction, timing for due diligence, contingencies, and the timing to execute a final definitive agreement.  

While it is not legally binding, the LOI is an important part of a purchasing process because it typically means that both parties have fundamentally agreed on a purchase price, basic terms of the deal and have agreed to negotiate exclusively with each other. 


Example:

The following is a very “vanilla” example of an LOI for reference, but it is strongly recommended that legal counsel prepare the LOI to ensure the business is protected during the M&A process.

Date

Owner’s / Seller’s Name
Company
Address

Dear Mr. Seller:

This letter puts forth the non-binding intent of Buyer Name (Buyer) and Seller Name. (Seller) to enter into an Agreement whereby Buyer would purchase essentially all of the tangible and intangible assets, operations, and company name for the sum of Total Price, plus (or minus) the amounts for inventory, accounts receivable, accounts payable, and work-in-process (at cost) at the time of closing.  Such amount to be paid for as follows at Closing:

$XXX deposit on date executed by Buyer and signed by Seller and shall be applied as part of the payment at closing, but shall be refunded if no closing occurs on or before DATE.
$XXX note payable to Seller at a X% rate for XX  months,
$XXXX, (plus or minus adjustments), to be paid in certified funds.

This offer will remain open until 5:00 p.m. on DAY, DATE, and will automatically expire unless accepted before that time.

It is the intention of Buyer to offer employment after the sale to all of Seller’s employees.

The above purchase price shall include inventory of $XXX at Seller’s cost.  If the actual amount is more, then the note payable to Seller shall increase accordingly. If the actual amount is less, the purchase price and down payment shall be adjusted accordingly.  In no event shall inventory exceed $XXX.

The above purchase price shall include accounts receivable of $XXX on the date of closing. .  If the actual amount is more, then the note payable to Seller shall increase accordingly. If the actual amount is less, the purchase price and down payment shall be adjusted accordingly. In no event shall accounts receivable exceed $XXX.

The above purchase price shall include accounts payable, which the Buyer shall assume, of $XXX on the date of closing. .  If the actual amount is less, then the note payable to Seller shall increase accordingly. If the actual amount is more, the purchase price and down payment shall be adjusted accordingly.  In no event shall accounts payable exceed $XXX.

The obligation of Buyer and Seller to consummate the transaction anticipated by this Agreement shall be subject to the following:

Execution of a definitive Contract for Sale acceptable to both parties on or before DATE, which specifies the assets and liabilities to be acquired from Seller by Buyer and contains the customary warranties, representations and other provisions for a transaction of this type.

Seller warrants that at the time physical possession is delivered to Buyer, all equipment will be in working order and that the premises will pass all inspections necessary to conduct such business.

The Seller warrants that it has or will have clear and marketable title to the business being sold, except for the Genesis II measuring system.

Adjustments and pro-ration shall be made at Closing for rent, utilities, and property taxes.

Buyer must find acceptable financing for a portion of the purchase price.

Seller shall assist in delivering, and Buyer must receive, a lease agreement with rates and terms that are acceptable to the Buyer for the property at ADDRESS.

Buyer, and/or his agents, shall have the right to review all books and records used in the preparation of the financial statements and tax returns for the last three years.

Owner shall stay on for a maximum of XX months at a compensation rate agreeable to both parties.

Buyer shall pay all sales tax on fixtures and equipment, if any.

Seller shall execute a 5 year non-compete agreement.

Closing shall be on or before DATE at a place and time agreeable to all parties.

From the signing of this letter of intent until Closing, Seller shall operate its business under the normal course of business and Seller shall not present, enter into discussions, or offer to sell its business to any other party.  This paragraph shall be binding on the parties although the balance of this letter only expresses the intentions of the parties.


 
Conclusion:

The LOI is legal document containing the initial agreement of both parties to complete a contemplated transaction that is non-binding in its nature.  The author is not an attorney and does not purport to offer legal counsel, but only provide a general overview of the letter of intent as part of the overall M&A process.  Therefore, it is strongly recommended that legal counsel be engaged and represent both the buyer and seller during the entirety of the M&A process to ensure all legal rights are protected. 

Keith McAslan is a Partner with CxO To Go a national professional services company headquartered in Denver, Colorado that provides on-demand C-Level expertise and best practices to client companies on a part time, flexible, and affordable basis.

Keith is sought after to provide advisory services as the trusted advisor to Owners and CEO’s. By utilizing his extensive experience as a successful financial and operational C-level executive, McAslan brings a results driven leadership style to complex situations.  McAslan’s expertise includes: financial advisory; management consulting; part time, interim & virtual CFO, COO and CEO; debt and equity financing; turnaround management; acquisition and divestiture advisory.

 Most recently Keith, was instrumental in the successful sale of Western Forge to Ideal Industries. As the interim CFO with finance and private investment transaction experience, guided the management team through the sale and due diligence process completing the sale from prospective buyer presentation to close within 60 days.  

by Marty Koenig and Keith McAslan
Partners at CxO To Go^TM

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