SUMMARY:

In any M&A deal, don’t under-estimate the importance of the initial Letter of Intent (LOI).
Consider, among other things, the following:
(1) The price
(2) The deal structure
(3) The payment milestones

(4) Etc.

Read on. This is Article is part of a series.

We are experienced M&A consultants. Can we help you? Need more info?

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ARTICLE:

Entrepreneurs everywhere dream day and night about their multi-million dollar exit. Serial exiters know it isn’t so easy. Exit deals take on a life of their own, especially if you don’t plan ahead and build in some shock absorbers too. One of the reasons is that even if the deal does go ahead, the resulting merged group may still under-perform. And once the deal is announced, not all the employees may stay – on both sides. So the buyer will ask many questions at the negotiation and due diligence stages aimed at working out how to successfully integrate the “target” company into the post-deal activity.

So negotiating the Letter of Intent (LOI) – also known as the “term sheet” or “memorandum of understanding” – is critical to everyone. The seller wants a good price, the purchaser wants a good buy. Both want least risks. And yet some skip the LOI to save time and money and go straight on to the main agreement.

Whatever you do, take legal advice. But also consider the strategic side.

The LOI Process:

The aim of the LOI is to fix the main terms of the deal including what is being transferred, the price, the payment milestones, the form of payment and other terms.

The seller typically enjoys highest negotiating power at the LOI stage which declines later on. There are several reasons including the following.

First, the seller may have more suitors still in tow.

Second, as time passes, a leak is more likely which may unsettle employees, customers and others.

Third, at the LOI negotiation stage, the seller can float a few trial balloons. As time passes, things get more formal and the seller may be keener to avoid saying something that may upset the buyer.

Fourth, once the LOI is signed, the buyer can more easily resist further demands from the seller, and vice versa.

Much depends on which side has the better playing cards. Waze (SatNav mapping company) apparently had the upper hand when negotiating its own sale to Google. It seems Google wanted to shut Facebook out of its mapping service at almost any price. So the price reportedly ended up at around $1.15 billion.

So the seller will generally want to get as much as possible at the LOI stage. The buyer may prefer a short LOI and will then seek clarifications at the main contract stage when they have greater leverage.

Why? After the LOI stage comes due diligence and contract drafting. At the contract state, each party must provide detailed “reps and warranties”. These are assertions of facts that need to be truthful to avoid lawsuits. The seller’s assertions typically relate to the value of the company. The buyer typically confirms the consideration to be paid. These reps and warranties therefore allocate risks and lay down rules of behavior during and after the deal.  All this puts the dampers on going back to re-opening the LOI terms.

What about tax?

Sellers typically prefer a share sale to reduce the tax due. Buyers typically prefer an asset purchase which increases the sellers’ overall tax burden. If the seller is paying with its own stock, a tax ruling is sometimes needed, which takes time. All this wants sorting out as soon as the LOI looks like being signed. If the deal has to be announced on a stack exchange, timing is especially important.

Negotiation tactics:

There are many negotiation tactics ranging from quiet to noisy. Sellers may resort to auctions to get the best sale price. Both may seek a win-win failing which they should know their BATNA (best alternative to a negotiated agreement).

And negotiations can range from rational to instinctive (=irrational). So study the people, get in information, decide the form and channel for offers, never say no straight away, and keep the momentum up by negotiating multiple issues in parallel. And before you go in, consider your strategy and theirs, work out the acceptable price range, keep an open issues list and have a step plan among other things.

To Sum Up:

All in all, do your homework early on, in time for the LOI stage.

Next steps:

1. Contact us if you are looking for an M&A candidate to buy or sell.
2. Contact us if you have your candidate and want to prepare for a deal.

We are M&A advisors and coordinators. We maintain complete confidentiality and aim to avoid all conflicts of interest. If you hire us, the other side cannot. Always consult legal and professional advisors in each country at an early stage and conduct sufficient due diligence procedures before signing anything. We will be happy to help you steer the M&A process.

We are experienced M&A consultants. Can we help you? Need more info?

Email: [email protected], cell: +972-54-6449398, www.MergeAcq.com

© All rights reserved. Leon Harris 15.11.24