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 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.
from Babson College in Boston, MA, USA
Tip: Always try to ensure a Seller knows that you’ve sent an IOI to a Broker. Either Cc the seller, or let him know the same day it was sent. Some brokers represent companies that they don’t really want to go into DD for unless the price is above market....this is because broker can’t support too many DD processes each year. They are like us, looking for a good return on time allocated. If this company isn’t one of their better ones, they may not even forward IOI to sellers if the initial offer is merely “at market”. Similarly, we don’t make offers on every CIM we see. It goes both ways.