Don’t Make These 5 Common Mistakes With Your LOI
When considering a letter of intent in your deal here are 5 common mistakes we have seen which you need to avoid on both sides of the deal table:
- Failure to provide for setoff rights – Solid indemnification provisions can help protect buyers from past liabilities, but it can be hard to collect if there are no “deep pockets” left after closing. Providing for setoff rights is one way to ensure indemnification is available.
- Failure to delineate specific representations and warranties – The strongest position a prospective buyer will hold is while negotiating the terms of the deal. Failure to negotiate adequate reps and warranties from a position of strength may make it difficult to achieve maximum protection and favorable risk allocation when definitive documents are being drafted.
- Failure to identify proper parties (including owners of real property) – When multiple individuals own equity in a company, it is important to ensure that all required parties are signatories to the letter of intent. While all equity holders may not need to sign a letter of intent, identification of required signatories is paramount. Likewise, if real property is included in the deal, it is important to correctly identify the property owner(s) which may not mirror the business owners.
- Failure to include a financing contingency – Most letters of intent are signed before financing for the deal has been secured. In the unlikely event a buyer cannot obtain financing or cannot do so on commercially reasonable terms, a means to exit the transaction is necessary. Failure to include a financing contingency can leave a buyer trapped in a transaction with no way to exit.
- Failure to provide for termination of the LOI – With exclusivity typically provided for in letters of intent inclusion of a termination provision is necessary. Absent means to terminate the LOI, a seller will be prohibited from negotiating with alternative buyers in the event a deal craters.
There are many other errors we see when buyers craft their own LOI which can be avoided by securing counsel early in the acquisition process. These are just some of them. Jacquelyn Jordon Core and Michael T. Voytek are Founding Partners at Jordon Voytek. They focus their practice on mergers and acquisitions, specializing in bringing sophisticated buy-side and sell-side transactions and unique deal structures to businesses of all sizes, from main street to the middle market. They are available for consultations to ensure businesses are best protected from the drafting of the letter of intent forward.