The key role of the letter of intent in M&A transactions
In corporate transactions, not only hard criteria such as key financial figures and strategic potential are important, but also soft factors, in particular the human aspect with all its needs, fears and idiosyncrasies. The creation of a Letter of Intent (LOI) links these two aspects in a decisive way. Jan Steinbächer, Director M&A at Emporion, explains the challenges that can arise.
Letter of Intent (LOI) in the M&A process
The initiation and preparation of M&A transactions are extremely complex in terms of time and content. After initial contact and several rounds of talks, it often takes months for the parties to agree on the rough parameters of a planned transaction. The LOI plays a decisive role in this context.
Differences between LOI and purchase agreement
The LOI, as a declaration of intent, is not legally binding apart from a few points. Nevertheless, it is of great importance as it outlines the key points of the intended transaction. This ensures a congruent understanding between buyer and seller in order to avoid misunderstandings – a decisive factor for the success of the transaction.
Scope of an LOI in practice
Experience has shown that the average length of an LOI is around two to three pages, with generic points often recurring in a similar form. However, Emporion has decided to make LOIs much more comprehensive. This enables a more in-depth consideration, particularly with regard to “soft” topics such as shared vision, corporate culture, values, security and the preservation of company locations.
The importance of a comprehensive LOI
Although a non-binding purchase price stated in the LOI is central, it is often not the sole criterion from the seller’s point of view. Company sellers often strive for an overriding sense of purpose that is rooted in the continuation of their life’s work. Emporion therefore not only addresses financial aspects, but also emphasizes the importance of these soft factors.
“A reasonable price is usually the basic prerequisite for agreeing to a deal in the first place. In addition, company sellers very often also strive for an overriding purpose, which is almost always based on the continuation of their life’s work – ‘just’ money for shares is not everything in the vast majority of cases.” Jan Steinbächer, Director M&A at Emporion
Advantages of the LOI for the seller
The LOI makes it easier for the seller to compare offers, especially when talking to several interested parties at the same time. In addition, the LOI serves to verify the buyer’s commitment and provides insights into its strategy, including planned post-closing investments or restructuring.
Expectations of the LOI on the part of the customer
Customers expect the LOI to identify potential deal-breakers at an early stage and clarify all relevant points. It is also important to check the commitment of the sell side to ensure that the transaction is actually to be carried out on the basis of the factors specified in the LOI.
Emporion’s role in the LOI process
Emporion plays a central role in this project step. In contrast to other M&A advisors, who often leave the preparation of the LOI to the client or their legal advisors, Emporion actively helps to draft the LOI or writes it itself in close cooperation with the client. The deep insight into the company that was gained during the project made it possible to consider even supposedly minor issues. A well-structured LOI creates security for both sides and forms a seamless transition to the actual purchase agreement (SPA).
Conclusion
The letter of intent plays a central role in the M&A process. Through a comprehensive design, not only financial aspects, but also the human and strategic dimensions can be adequately taken into account. Emporion relies on a holistic approach in order to lay the foundations for a successful conclusion of the transaction right from the LOI.