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Acquisitions: Letter of Intent

What is the purpose of a letter of intent in a business acquisition? And what parts should be included?

Declaration of Intent - a first formal agreement

At business acquisitions is the letter of intent, or letter of intent in English (LOI), an important area. The letter of intent acts as an initial formal agreement between buyer and seller and lays the groundwork for how the deal will be framed. By defining the basic terms of the transaction before the due diligence process and the definitive agreements are established, the basis for the further process is laid.

Negotiation and signing

The negotiation of a letter of intent can be an intense process, filled with discussions and compromises. The goal is for both parties to feel comfortable with the agreed terms, increasing the chances of the deal being successfully completed. Once a letter of intent is signed, it signals that the parties are serious and committed, creating a strong foundation for the upcoming negotiations.

What can be included in a statement of intent?

A letter of intent may include a number of areas aimed at clarifying expectations and creating a structured process leading up to the completion of the transaction, including:

Overarching conditions

It specifies the main terms of the acquisition, such as purchase price, purchase price structure and other key aspects agreed by the parties. This is often the most detailed part of the letter of intent and forms the basis for the final agreements.

Due diligence

The letter of intent specifies the scope of the due diligence process, including which areas will be reviewed and how long the process is expected to take. This gives both parties a clear picture of what it will take to move forward with the deal.

Exclusivity

In some cases, the parties may agree on a period of exclusivity for the buyer, which means that the seller may not negotiate with other potential buyers during this time. This gives the buyer time to complete due diligence and negotiate the final terms without risking competition from other interested parties.

The future role of the seller

This part of the letter of intent describes the role of the seller after the acquisition. It may include continued operational work and leadership, consulting, or other specific duties that the vendor is expected to have.

Comprehensive integration plan

In some cases, a comprehensive integration plan may be included in the letter of intent that sets out how to integrate the target company with the buyer's existing business. This can include anything from merging IT systems to changes in corporate culture and human resource management.

Confidentiality and Termination

The letter of intent also often includes confidentiality clauses, ensuring that confidential information is not disseminated during negotiations. In addition, it establishes how the contract can be terminated if the parties cannot agree on the final terms.

timescales

Finally, time frames are established for the various steps until the completion of the transaction. This includes deadlines for due diligence, negotiation of definitive agreements and the actual completion of the deal.

The letter of intent is a central part of the acquisition process that helps ensure that both parties agree on the basic terms before due diligence begins. It is often worthwhile to put a little extra time and effort into this phase and agree on all the essential conditions already at this stage before the parties invest too much time and money. By clearly defining expectations and creating a structured process, the letter of intent helps build trust and increase the likelihood of a successful business acquisition.

At FLB Partners, we offer expertise and support throughout the acquisition process, from strategic planning to integration. Contact us today to discuss how we can help your company develop and implement an effective acquisition strategy.