Drafting a Letter of Intent (LOI): Key Components and Best Practices

Blog by Ben Greenberg, VP of Corporate Development at IT Solutions

If you’re considering M&A initiatives or navigating the challenges of growing your MSP, we invite you to explore our M&A resources.

What is an LOI?

A letter of intent (LOI) is a document that outlines the main terms and conditions of a proposed transaction between a buyer and a seller. It is usually prepared by the buyer and sent to the seller after the initial discussions and preliminary due diligence. An LOI serves several purposes:

• It demonstrates the buyer’s serious interest and commitment to the deal.
• It provides a framework for the negotiation of the definitive agreement.
• It identifies the key issues and due diligence plan.
• It sets the expectations and timeline for the closing of the deal.

An LOI is not a legally binding contract unless certain provisions, such as confidentiality and exclusivity, are defined. However, it is a critical step in the deal process.

Key Sections of an LOI

Section	Description
Background of the Buyer	Introduction of the buyer and its business Rationale and strategic fit of the acquisition Benefits and value proposition for both parties
Valuation	Purchase price and payment method Adjustments or contingencies that may affect the final price
Deal Structure	How the buyer will fund the transaction Legal form and structure, including tax considerations If applicable, earnout conditions
Conditions/Terms	Main conditions that must be satisfied or waived before the deal can be closed Examples include restrictive covenants, reps and warranty considerations, NWC mechanics, purchase price adjustments, and general indemnity holdbacks.
Due Diligence Plan and Timing	Scope and process of the due diligence process Timeline for completing the due diligence and closing the deal
Plans for Management	Expectations and intentions of the buyer regarding the involvement and retention of the seller’s management team
Approval Required	Approvals requirements, such as board of directors, investment committee, shareholders, regulatory bodies Who is required to obtain such approvals
Exclusivity	The seller typically agrees not to solicit or entertain any other offers or discussions with other potential buyers until a pre-determined date or mutual agreement to terminate.
Transaction Costs	The buyer and the seller usually agree to bear their own costs and expenses related to the deal, such as legal, accounting, and consulting fees.
Access/Disclosures	The seller should agree to provide all the information and documents that are relevant and material to the deal, and to notify of any changes or developments that may affect the deal. Confidentiality shall remain between the parties throughout the process.
Binding/Non-binding Obligations	The buyer and the seller agree that the LOI is not a legally binding contract, except for certain clauses such as confidentiality, exclusivity, and governing law. The LOI is subject to the execution of a definitive agreement that contains the full and final terms and conditions of the deal.

Tailoring Your LOI to Fit the Deal

It is important to note that every deal is different—there is no one-size-fits-all template for an LOI. Depending on the nature of the business, the industry, and the preferences of the buyer and the seller, some LOIs may include additional or alternative sections that address specific issues.

For instance, we always include in our LOIs that we expect the seller to use legal counsel with adequate M&A experience. This is important for us, as given the niche expertise of M&A, the probability of the deal falling apart significantly increases without experienced counsel.

Key Takeaways

An LOI is a critical step that can be tailored to protect both buyer and seller interests. Negotiation timing can vary in duration depending on the complexity of the deal, and the level of prior agreement on the key terms. Generally, it can take anywhere from a few days to a few weeks to finalize an LOI. However, the LOI is not the end of the deal-making process, but rather the beginning of the detailed diligence and contract drafting stages.

Embarking on the journey of M&A growth is both thrilling and demanding. If you’re considering M&A initiatives or navigating the complexities of drafting a Letter of Intent, we invite you to check out our resources and explore how we can support your business’s growth.