The M&A Growth Bulletin

News and Insights on M&A for the Middle Market

What Not to Include in the Letter of Intent

A letter of intent (LOI) is one of the most commonly used tools for moving a deal forward. The LOI outlines the basic parameters for an acquisition including the period of exclusivity, purchase price and consideration, preferred deal structure, and expiration date.

The LOI is your chance to communicate the strategic value of an acquisition and make sure that everyone is on the same page. Although typically it is not binding, by signing the LOI you both are morally committing to the acquisition so it's important to carefully consider what you include in the document. Naturally, both parties may negotiate on different points such as purchase price or the period of exclusivity before signing the document to arrange the deal to their advantage. However, there are some items that you, as a buyer, should not include in the LOI.

1. Binding provisions

Most LOIs are non-binding, which means neither you nor the seller are required to execute the acquisition. A signed LOI marks the beginning of formal due diligence when you'll get access to confidential information including the seller's financials. Legally committing to executing the acquisition before you have all the information is a bad idea.

During the due diligence process and during negotiations you may uncover issues that make you want to alter the provisions set forth by the LOI. For example, you may wish to lower the purchase price due to liabilities, or decide you need an owner or executive to stay on for a period of time after closing.

2. Breakup fees payable by the buyer

This is self-explanatory, but you don't want to pay a breakup fee if you decide to say "no" to a bad deal. Breakup fees are more common in large publicly-traded transactions which are subject to regulatory scrutiny. For example, Disney will play a $2.5 billion breakup fee if regulators block its acquisition of 21st Century Fox. If, during due diligence, you uncover new information, or if something happens that significantly impacts the deal – the seller loses their customers, the owner dies, the economy crashes – you want to have the flexibility to walk away.

3. Earnest money deposits

Buyers sometimes make a good faith payment to the seller to demonstrate their commitment to executing the deal. However, a signed LOI is an excellent way to indicate continued interest and commitment to a seller. It's best to avoid paying the seller prematurely, in most cases, because the LOI does not legally require the seller to sell their company. Wait until the definitive purchase agreement is signed.

Getting a signed LOI is a significant milestone in the M&A process that signifies the beginning of formal due diligence and moves you closer to sealing the deal. When drafting the LOI, it is best to avoid binding provisions, breakup fees, and earnest money deposits so you can build in maximum flexibility for due diligence findings and negotiations of the best acquisition for your company.

Do you have questions about M&A? We would love to hear from you. Please contact us at 703-854-1910 or

Winter 2018

It's a Big Deal: M&A in the News

Disney to buy 21st Century Fox

Faced with competition from Netflix, Amazon, Apple, and Google, Disney is moving into digital streaming with this $52.4 billion acquisition.

Mars invests in Kind Snacks

As consumers increasingly turn to healthy foods, the maker of Snickers will reduce its dependence on candy and gain a foothold in the healthy snack market. The minority investment allows Kind to remain private and led by founder David Lubetzky.

Nestle uses M&A to refocus on health and wellness

The company is currently divesting of underperforming brands like its U.S. chocolate business to focus on fast-growing segments. Recent acquisitions include vegetarian food company Sweet Earth and vitamin maker Altrium Innovations.

David Braun's Tip for Growth

Remember the human factor

Don't get so caught up in excel spreadsheets and EBITDA multiples that you forget about the humans involved in the deal.

Acquisitions involve much more than just financial figures. Especially in privately-held, not-for-sale acquisitions, where owners often view their company as their baby, convincing them to sell to you involves much more than just a fat check.

Consider the owner's drivers and motivations. What does he or she really care about?

Developing a strong relationship with an owner early in the M&A process will greatly benefit you when it comes to due diligence and negotiations.

Upcoming in M&A Education

The latest events from M&A U™

How to Pick Top-Notch Markets Before rushing off to identify a list of acquisition candidates, make sure you look at the right markets.*

1 PM EST – Feb 20, 2018

Building a Robust Pipeline of Acquisition Prospects Learn how to identify the best companies for acquisition.*

1 PM EDT – Mar 15, 2018

"The First Date": Contacting Owners and First Meetings Find out what to say (and what to avoid) when speaking to owners.*

1 PM EDT – Apr 19, 2018

* CPE credit is available

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