How do searchers move from IOI to LOI?
May 25, 2021
by a searcher from Harvard University - Harvard Business School in London, UK
What sort of DD do searchers do to move from IOI to LOI?
Trying to work out what needs to be done to progress to the next stage and apart from modelling out revenues and costs more detailed than pre-IOI is there anything else we should be doing?
from Massachusetts Institute of Technology in Miami Beach, FL, USA
After the “hey, I like your business” comment, I just try to answer up to a half-dozen key questions I thought of since the initial call. I limit my “DD light” for two reasons: (1) to be respectful of the seller’s time and (2) to prevent myself from spending time in DD on a business that was not a good candidate to begin with.
from State University of New York at Stony Brook in Boynton Beach, FL, USA
A Letter of Intent is an altogether different document. Buyers typically claim that the LOI is a nonbinding agreement. Seller beware. This is generally true from the point of the buyer, whose attorneys are usually the authors of such documents. Buyers are not held to any terms, but sellers can find clauses within the LOI that are certainly binding for them.
As an intermediary am a firm believer that the LOI should be a transparent document, fair to both sides. Starting off with a one-sided, biased LOI will more than likely result in a not so successful transaction.
A letter of intent can be used by both buyer and seller in a very fair way to identify and resolve many of the critical issues that can tank a deal. For example, unambiguous statements regarding deadlines for exclusivity and due diligence helps a deal get to a go / no go point far more quickly. Why waste time if “meetings of the mind” will never be met. The LOI can also be used to identify the early-on timing for determining the allocation of purchase price, many times a deal killer at or near closing. The third big issue that can be dealt with as part of the LOI is the timing of the determination of the working capital target, another late-occurring deal killing issue.
It may take a bit longer to agree upon a fair and unbiased Letter of Intent. However, such an exercise will certainly shorten the length of time and expense in negotiating the definitive purchase and sale agreement, not to mention the months of time wasted to get to that point, only to find that the deal will not work.
So, my advice to both seller and buyer is to take seriously the creation and negotiation of the Letter of Intent in a fair and unbiased approach. It will save much time and heartache going forward.