M&A Letters of Intent: Are They Really Necessary? - YouTube

Hi everyone, hope you're having a great week. Today we're gonna talk about LOIs

or letters of intent, and how they're used in the merger and acquisition process.

I f you're going to be involved in M&A in any form or fashion you need to

understand LOIs, you will run across them. First a few words about me

I'm Brett Cenkus. I'm a business attorney. I do that from my practice

Cenkus Law. I'm also a startup and business consultant and I do that out of

my brand The Startup Sheperd. A large part of what I do is mergers and acquisitions.

I've done it at very high levels billion-dollar front page of The Wall

Street Journal kind of stuff in my life today, I'm involved a much smaller deals

half a million up to about 20 million dollars. What they call the Main Street

part of the market which is under about 2 million bucks up into the lower middle

market. The lower middle market people will say generally runs up to about 50

million, so I kind of play in that lower half of the lower middle market if you

will. There's a saying in the industry that the only difference

between a billion dollar deal on a 10 billion dollar deal is the number of

zeros to the left of the decimal place and there's some truth to that for sure,

the structure and what's going on is very similar. Of course they're

lawyered differently, the players are different, the amount of money at stake

what's being purchased how the deals are structured there's differences. And, this

content really is squarely aimed at that Main Street lower middle market half a

million to 20 million dollar kind of range. So, let's get right into it

LOIs, letters of intent - you need to understand them if you're going to be

involved in mergers and acquisitions. I get asked all the time "what are these?"

"how do they work?" "Do I even need one?" So, a letter of intent is a short document

couple of pages can be as long as about 10 pages they're rarely longer than that,

but a few pages that lay out the key terms of the deal. So, purchase price

How much is the buyer paying? How is the buyer paying that is

it all in cash? Is the seller going to hold a note, carry back some financing?

What exactly is the buyer purchasing? Are they buying the assets of the business?

If so, is it all the assets is the seller going to hold on to some? Is the buyer

purchasing the stock of the business of the target? Is it

actually a true merger? Although mergers, one half of the term M&A (mergers &

acquisitions) there's not that much merger activity at the segment of the

market that I'm talking about, the sort of lower end of the market.

They're very tax-driven and don't show up on kind of smaller deals but what is

that structure of the deal? What about employees? Are the employee is going to

go work for the buyer after the closing? Are there conditions to the closing,

things that are in the buyers mind that need to prove to be true during the due

diligence period for the buyer to be willing to close the deal? There's two

provisions - exclusivity and confidentiality that are almost always

in a letter of intent. Exclusivity says that the seller will not talk to other

parties, will not continue to shop their deal for some period of time - commonly 60

or 90 days. It can be a little bit longer depending. Confidentiality is really

the buyer's agreement, although the door swings both ways, but really it's the sellers

concern and the buyer representing the buyer will use the information that the

seller gives the buyer during the due diligence period. The buyer won't use

that other than deciding whether or not to do a deal - it won't disclose that

information to anyone else. A lot of the information the seller will share is

gonna be non-public and sensitive information. So those are kind of the

general provisions or terms in a in a letter of intent - almost entirely

non-binding which means that most of those terms are just intent.

They're just what the parties intend to agree to in the future, hence the term

letter of intent. The provisions about exclusivity and confidentiality, those

are usually binding and usually the only but two binding terms in a letter of

intent. The rest of it no legal force or effect, so begs the question

right "why even use them?" if it's all non-binding. It's a very good question.

Generally, I use them in three situations. One is we want to be

absolutely sure the parties are on the same page. So, it's a complex deal there's

a lot of moving parts. We want to make sure that we use our time efficiently -

the lawyers that is - when we start to put together the documents. Let's be sure

that there's a meeting of the minds on the main

provisions. Two, to see that the buyer's serious. Although it's non-binding other

than these two provisions, most buyers aren't going to sign something unless

they're moving forward in good faith, unless they're serious about trying to

get a deal done. Number three - if we just need to get something done and show

some movement. So, we want to make sure we got stuff moving along - the purchase

agreement for one reason or another is gonna take a long time to draft and

negotiate. This is a quick way to show a little bit movement and keep things

going and sometimes that's important for the process. But, I've got clients who you

know so I use them and don't use them. To me they're useful in certain contexts

and not others. I have clients who are categorically opposed to them, others who

always want to use a letter of intent. I'm curious, if you've been involved in

M&A you've certainly stumbled across letters of intent, do you think they're

useful? Are they important, are they worth the time and the money that goes into them?

Scroll on down leave a comment let me know. If you want to learn anything else

about letters of intent or mergers and acquisitions generally, startups and

other business issues, visit me at cenkuslaw.com. Hope you enjoyed the

content today.