Executing a Letter of Intent (LOI) constitutes a critical juncture in merger and acquisition (M&A) activity, so why is an LOI for the most part nonbinding? A seller simply cannot afford the distraction, time and expense involved in having multiple prospective buyers simultaneously reviewing the seller’s confidential documents and performing due diligence.
The fact that LOIs are nonbinding gives rise to three very serious considerations on the seller’s part:
- Thoroughness of the business terms.
- Assessment, evaluation and disclosure of all risk.
- Accuracy of the data that the LOI is based.
When the seller of a business receives an inadequate Letter of Intent (LOI), the seller should not hesitate to create a “Reverse LOI” that eliminates the original LOI’s shortcomings. In the absence of serious changes in the context of a transaction, attempts to change a LOI terms after signing reflect poorly on the seller and/or buyer’s acumen and integrity.
Successful M&A transactions should be win-win events that produce value for both buyer and seller. Although celebrated, the signing of the LOI signifies the beginning of the negotiations to close the deal when the value and significance of the buyer and seller’s M&A teams will be earned.