The LOI Process

Here’s a description of the variety of processes and styles of negotiating the LOI:

• Who Prepares the LOI: Most LOIs are drafted by the buyer. An LOI may be drafted by the seller if they have a strong negotiating position, are dealing with multiple parties simultaneously, or if the buyer is an individual or smaller competitor who doesn’t want to bear the cost of an attorney at this stage of the transaction. As the seller, you should always seize the opportunity to prepare the LOI, if possible. In some cases, the party preparing the first draft may propose a one-sided agreement in which significant changes to the document must be made. This slows down the process and causes momentum to be lost. In these cases, your attorney or M&A advisor may counter with a reverse LOI – or an LOI that’s a new draft. This is practical in cases where the first draft is so off the mark that it would be more suitable to prepare a new LOI than red-line the buyer’s draft.
• Number of Pages: Some LOIs can be as short as one page, whereas others can be as long as six to seven pages. Most range from about two to four pages.
• Skipping the LOI: Some parties choose to skip the LOI and jump straight to a purchase agreement, but this is rare. This would be most common if you have a strong negotiating position, the buyer has already performed some preliminary due diligence, or if the buyer is a direct competitor, and engaging in due diligence would be a risky proposition for you. I estimate this happens less than 2% of the time.
• Format – Letter vs. Agreement: Most LOIs are a mix between a letter and a more traditional legal agreement. There’s no legal requirement for it to be prepared in any specific format. Most begin with a few paragraphs of introductory niceties and then segue into the proposed terms of the transaction. Most buyers prefer the LOI to be as informal as possible and contain the minimum amount of information to move to the next step in the transaction – due diligence. You should strive for the LOI to be as detailed and specific as possible.
• Process of Making Changes: It’s customary for the buyer and seller to exchange red-lined or edited versions of the LOI in Microsoft Word. If the buyer prepares the first draft, the buyer often initially sends the LOI in PDF format and sends the Word format only upon request from your attorney. The two sides then trade red-lined versions until an agreement is reached. It’s wise to start each new round of negotiations with a clean draft, with no changes tracked, as tracking successive changes can become difficult after the second round.
• Discussing Issues on the Phone: It’s also wise to discuss any potential issues on the phone to help the parties understand each other’s motivations behind the requested changes. This allows each side to propose creative alternatives that meet both parties’ needs in order to reach a mutual agreement. 
• Time Frame to Sign: Most LOIs take one to three weeks to negotiate. Many may think this amount of time is unreasonable, but this has been my experience. Each round of negotiations usually takes one to three days per side, so one round of negotiations for both sides might take two to six days. On average, most negotiations take two to three complete rounds of changes, for a total of 4 to 18 days. Throw in a couple of weekends, and the average works out to between two and three weeks. If you’re dealing with other buyers, the negotiations can take longer, as most sellers will wait to receive an LOI from all parties before moving forward with any one buyer.
• When the LOI Is Signed: Most LOIs are signed one to two months after a non-disclosure agreement is executed. In some cases, a buyer may take as long as six months or more, as they sometimes evaluate other opportunities before returning to express interest in the business. A buyer usually spends the first one to three weeks reviewing the CIM, asking you questions, and requesting additional information. If the buyer is interested at this point, the buyer may request a face-to-face meeting or may have questions regarding the financial statements. The buyer may then spend two to three weeks contemplating the acquisition, analyzing the financial statements, and preparing a valuation model to determine their offering price. Altogether, this process takes most buyers, on average, a month or two before they’re prepared to submit an LOI. Of course, some buyers move much more quickly, but they’re the exception rather than the rule.
• Negotiating Tactics: Some buyers initially offer a high price with the intention of working the price down over the next few months. Other buyers take a middle-of-the-line approach and make a reasonable offer they plan to stick with. The only way to tell the difference between the two types of buyers is to attempt to flush out their motivations through more thorough negotiations and to pin them down on specifics. Buyers with insincere motives will often attempt to avoid agreeing to specifics, such as milestones, deadlines, and other risk-averting measures.
• Seriousness: Some buyers, such as so-called search funds, aren’t sure if they can obtain financing and therefore attempt to quickly agree to an LOI so they can begin their search for financing. It’s important to gauge a buyer’s ability to consummate the transaction. A search fund, or independent sponsor, appears to be similar to a private equity group on the outside, but they don’t have the capital already committed from investors. Once they sign the LOI, they then attempt to raise funds for the acquisition. 
• Degree of Detail: Some parties negotiate only the high-level terms of the transaction, such as purchase price, while others nail down all the specifics. I strongly recommend you attempt to nail down as many specifics as possible without overly sacrificing momentum. This takes more time but ensures mutual alignment and keeps you from unnecessarily locking up your company. It also reduces the risk that you’ll invest a significant amount of time and money performing due diligence, becoming more financially and emotionally invested in the transaction, thus resulting in less negotiating leverage. Achieving the right level of detail is a delicate balancing act that any experienced M&A attorney can assist with.
• The Final Offer: We’ve all heard it before – “This is my final offer.” This is an amateurish negotiating gambit that some buyers may use. I suggest you ignore the “final offer” warning – it’s rarely true.
• Public Companies: Public companies often avoid submitting an LOI because doing so is considered a material agreement and triggers a reporting obligation, which can then spur competition for the acquisition. 

Learn More About Search Funds and Independent Sponsors

To learn more about what a search fund or independent sponsor is and how they’re different from private equity firms, you can listen to my M&A Talk podcast, where I fully explore the world of independent sponsors with John Koeppel, an M&A attorney specializing in private equity. Are their criteria different from that of other investors? What should you know about independent investors before you consider selling your business to one? Check out the Resources section of our website at morganandwestfield.com/resources/podcast for the M&A Talk podcast episode titled The Basics of Independent Sponsors with John Koeppel to learn more.