What is a Letter of Intent in a Merger and Acquisition?

Mergers and Acquisitions are undertaken by companies to achieve growth and efficiency. The M&A strategies allow higher profits for a business than just organic growth. A study showed companies who use M&A strategies have a shareholder return that is 4.8 percent. Companies not using these strategies have shareholder returns of 3.3 percent. This has caused corporate players to see the disruption as a tool and they are capitalizing on the competitive markets opportunities.

The Legal Documentation

Once a non-disclosure or confidentiality agreement has been executed a non-binding letter of intent is required. This legal document shows the intent to proceed with a merger, venture or purchase and contains the details for the transactions terms. This includes timing, contingencies and specifics. The letter of intent, also known as a LOI allows both parties to come to an agreement on terms and pricing.

The Contents Of A Letter of Intent

The LOI should contain a definitive contract that is acceptable to both participants. There should be a specific date, assets and liabilities, provisions, representations and warranties defining the transaction in the LOI.

The seller should state all equipment is in good order and all inspections on the premises will be passed at the time the buyer takes possession.

The seller must ensure there is a clear title to the property or business being sold. All adjustments regarding property tax, utilities and rent will be made at the Closing. The lease with terms and rates must be acceptable to both parties and all books for the past three years may be reviewed. The buyer is responsible for sales tax on equipment and fixtures and the seller will have a non-compete agreement.

Any questions regarding an LOI should be approached in a consultation with the Palm Springs mergers and acquisitions firm. This consultation is highly recommended.