Letter of Intent - Contents
The conclusion of a Letter of Intent ("LoI") should be an integral part of every M&A process. Alternative terms with partly the same or marginally different contents for a Letter of Intent are: Term Sheet (often used in venture capital transactions), Head of Agreement (abbreviated to "HoA", term more commonly used in the UK), Memorandum of Understanding (abbreviated to "MoU", term also used in the US, among others). A Letter of Intent is in the first step a non-binding declaration of intent by the buyer, which should contain the most important aspects of a subsequent SPA (Sales and Purchase Agreement). In M&A practice, most letters of intent contain the same essential content, supplemented by content that is relevant and important for the specific M&A transaction.
Basically, our recommendation if you want to sell your company or buy a company is: In any case, conclude a letter of intent before you start the due diligence! Often both parties are of the opinion that this is not necessary because the most important parameters have been agreed verbally. This assumption is usually wrong. At the latest during the negotiation of the Sales and Purchase Agreement, the buyer and/or the seller will realise that important aspects were "forgotten" at the beginning of the talks.
Either one had tacitly assumed that the other party knew that such contractual clauses were "common" in M&A agreements or because one deliberately used a "salami tactic" and speculated that the other party would be more willing to accept such contractual clauses in the advanced M&A process. It is not uncommon for the buyer or seller of a company to discover that such contractual clauses are non-negotiable points, i.e. so-called "deal breakers" or "knock-out criteria".
The result is often that no agreement is reached and the negotiations are broken off. At this point, both parties have already invested a lot of time and money in the M&A process. Both parties could have saved themselves this investment and frustration by negotiating and signing a letter of intent.
Contents of a Letter of Intent
The following contents of a Letter of Intent are to be understood as examples and not as an exhaustive list. Every M&A transaction (acquisition/sale of a company) requires a letter of intent tailored to the deal.
Preamble
- Exact designation of the contracting parties
- Conditions for the sale of the shares
- Agreement on the conclusion of the final contract
- Necessary procurement of the required approvals from authorities and other bodies
- Exact specification of the shares or the objects and rights to be transferred as well as the liabilities to be assumed
Contents of the SPA
- Transfer of all shares etc. to the buyer
- Purchase price ( amount, payment, form [e.g. cash, shares, convertible bonds, put/call options])
- Agreements between buyer and seller on conditions to be included in the final contract, such as warranties; financial status of the company, taxes, other liabilities, collectability of outstanding debts; confirmation of the absence of obligations not listed in the balance sheet or/and indication of contingent liabilities and warranties; transferability of all contracts as well as the proper existence of the company; fixing of a percentage of the purchase price in a blocked account (notary escrow account, escrow account) for any unknown obligations or claims of third parties as well as for claims of the buyer from the aforementioned warranties and other claims. Escrow account, see also Escrow account on Wikipedia) for any unknown obligations or claims of third parties as well as for claims of the buyer arising from the aforementioned warranties and other claims; agreement on the interest on any cash contributed to a blocked account; customary non-competition clauses for the sellers for the period after they have left their active employment with the company; provisions on withdrawals (equity endowment, cash and debt free).
- Due diligence (content, process, timeframe)
Agreements on the conclusion of the final SPA
- Agreement on the timing
- Conditions for the final conclusion of the SPA
- Consent of the buyer and all sellers
- Consent of the supervisory board of the buyer
- Confirmation by the auditing company of a positive due diligence review
- No negative business development between the date of the LoI and the final SPA
- No legal restrictions for the seller
Framework data employment contract
Timetable from the signing of the Letter of Intent to the signing of the SPA
Confidentiality
Exclusivity
Expenses
Place of jurisdiction and applicable law
KP Tech Corporate Finance (Munich, Berlin, Frankfurt/Main, Duesseldorf - Germany)
As an owner-managed and independent management consultancy, we specialise in M&A and corporate finance consulting. Our clients benefit from more than 20 years of experience in international M&A and corporate finance consulting. The focal points of our consulting are the topics: Company sale, company acquisition, company valuation, company succession and private equity consulting.
