What are Key Items to Look for in an LOI? How do I know a Buyer is Serious?

While an LOI is a useful tool for outlining the main points of a deal, several of the key deal points might not be made available to you until you receive a draft of the purchase agreement. 

Below are a few items to consider when reviewing an LOI, as well as some context on how these terms may be further elaborated upon in the purchase agreement. As the seller, it is always helpful to advocate for as much specificity on these items as early as possible after signing an LOI. 

Purchase Price or Terms

Does the LOI state how much of the purchase price will be paid for in upfront cash vs. an earn-out? Is any of the purchase price being funded via stock in the acquiring company? Typically speaking, the exact structure of the purchase price will not be outlined until you receive the purchase agreement, but these are all important items to ask questions on if they are not specifically addressed.

For example, if a significant portion of your proceeds are going to be reinvested into the acquiring company, how is that stock valued and what % of the pro forma company will you own? 

Transaction Timeline / Understand Process for Confirmatory Diligence

Buyers typically will engage third party lawyers, accountants, and other consultants after they sign an LOI with the company. A well written LOI should provide clarity on which third parties the Buyer plans to engage and a rough schedule of when they plan to engage them. 

The most expensive work stream for your prospective buyer will be hiring lawyers to draft the purchase agreement. Oftentimes a Buyer won’t engage lawyers until they validate financials via a third party quality of earnings analysis, so if you learn that the Buyer plans to send you a draft of the purchase agreement then that is a very good indication that the deal is progressing towards the finish line. 

Employment Agreements

If you are planning to stay with the business post-close, the Buyer may require that you sign an Employment Agreement (EA) in order to close the deal. If an EA is mentioned in the LOI, you should ask for the key business terms (base salary vs. bonus, severance, etc) of this document outlined early in the diligence process.