LOI Offering Strategy (General vs. Specific)

June 19, 2023

by a searcher from Oklahoma State University in Wichita, KS, USA

At the LOI formation stage for a target company. As I draft the LOI Agreement I am considering how much detail to include. There appears to be two schools of thought around an LOI offering.

1. Simple & General
Approach: Cover the most important deal components with the benefit of increasing the chances of a signed LOI while possibly running into a deal-killer later in the process as the parties move to a Purchase Agreement. The main benefit is momentum which could help overcome issues that would otherwise kill the deal. The cost is time and due diligence expense.

2. Detailed & Specific
Approach: Include details on all known material components of the deal. Risk a rejection of the LOI but more quickly identify non-starters for each party. The main benefit of this approach is saving time and due diligence costs while possibly sacrificing deal momentum.

I would love to recruit thoughts on what searchers have seen as the most successful strategy at the LOI offering stage. Moreover, curious of any research that could provide a data-driven answer. Other ideas or strategies would be welcomed. Thanks in advance to your consideration in sharing your perspective.

Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA

2! Not sure if it is data driven as that would need blind randomization -- but we have an 81% close ratio over 10 years and several hundred transactions during that time frame. To me, #1 is like cotton candy, tastes great and is easy, but not the meal you need if you are going to run a marathon. I also think there is a third benefit to #2 -- preserve the buyer/seller relationship. Saving hard questions, like keeping/changing company name, employee retention, or NWC until the Purchase Agreement (or worse, later), is just asking for trouble. The farther you get into the transaction, the more deal fatigue sets in, the more emotional buyer and seller have the chance to become, and the harder it may be to address some of these issues.

Reply by a professional
from University of Southern California in North Palm Beach, FL, USA

Here’s a recording of my webinar attended by more the 100 people: https://youtu.be/EMhsZo1-40Q

Part 1 (of 2): How Pre-LOI Due Diligence Can Crater Deals

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