How detailed should an LOI be?

April 10, 2022

by a searcher in Chicago, IL, USA

I am wondering whether someone could please offer some insight into how detailed an LOI should be? For example, should it include price and terms for renting the business premises? Managers salary etc?

Or is this worked into the purchase agreement?

Thank you

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Reply by a searcher
from Georgetown University in São Paulo, State of São Paulo, Brazil

Hi - speaking from a broader middle-market, EM private equity/credit perspective here, but hope this helps###-###-#### % agreed with others above, the language on fundamental terms (assets, price, expectations on working capital, etc) should have the objective of reducing potential friction between buyer and seller. (2) On that note, if there are any other high-level terms that remain unclear, doesn't hurt to add them to the LOI. Using one of your examples above, one wouldn't necessarily add a manager salary stipulation to an LOI, but if that were a major point of question/negotiation from either buyer or seller, for whatever reason, better to address it now, (3) In my own experience, in terms of granularity, the whole LOI is unlikely to be longer than 3-6 pages. (4) the major clauses that are binding are confidentiality and exclusivity - again, important to establish these terms in clear language. Although I don't think any of the following should be particularly contentious, it is important to think about: With whom can confidential information be shared and under what pretense (like if you have some third party DD provider or a potential investor who could provide some particular value-add)? What is the seller reasonably restricted from doing during the exclusivity period (i.e. what is the normal course of business)? What happens if the exclusivity period has ended?

Reply by a professional
from Dartmouth College in Los Angeles, CA, USA

You should add specificity for elements of the business that you feel that you've been able to get a good grasp of based on diligence thus far. So for something like working capital, if you understand the business and are ready to negotiate the different components to include, what the target should be based on etc., then that should be dealt with in the LOI. Same with any salaries or consulting fees for owners. But if you're just digging in you don't want to negotiate on specifics where you still need to learn more, otherwise you may end up regretting getting too granular. Even though LOI's are non-binding, there's no better way to make a seller angry than trying to re-trade on the LOI terms. It's really more in the seller's interest to be more specific before they grant you exclusivity, so also keep that in mind. But you also want to make sure there's an actual deal on the table that works for you before wasting any more time. A balancing act, like all parts of an acquisition!

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