Part II: Negotiating the Letter of Intent

This is the second article in our series on “Closing a Private Equity Transaction.” As discussed in “Part I,” advance preparation is critical to getting a deal done. Once preparation for a potential transaction is complete, and an interested buyer or investor is identified, the parties will proceed with negotiating a letter of intent (LOI).

With a few exceptions (which are mentioned below), the LOI is a nonbinding document, but should include those terms essential for both parties to close the transaction. This is the moment when the parties will be in the best position to ensure that the time and expense that will be required for negotiating a definitive purchase agreement will be justified.  Such terms can include:

• Structure of transaction: equity versus asset purchase.
• Purchase price, and/or how the purchase price will be calculated, or adjusted at the time of closing.
• Form of consideration to be paid, which may be cash, rollover equity, a combination of the two, and/or a promissory note (with principal terms of the note included if possible).
• Required working capital at time of closing, and how it will be calculated.
• Any amount to be held in escrow, and the terms governing the payout of such escrow.
• Type of representations and warranties to be made, which would include the duration and any caps and baskets.
• Material terms of any expected post closing employment or consulting agreements for the sellers and/or key employees.
• Duration and scope of any restrictive covenants.
• Real estate to be included, or specific assets to be excluded (such as, accounts receivable).
• Time period for conducting due diligence, and target date for closing.
• Time period during which the seller will refrain from negotiating a similar transaction with any other party.
• Obligation to keep the terms of the LOI confidential.
• Any termination fee and/or transaction fees that are required to be paid by the buyer or investor in the event the transaction does not close.

As mentioned, while most of the terms above will be nonbinding, the following should be stipulated as being binding:

• Exclusive negotiations.
• Confidentiality of the LOI.
• Payment of any required termination fee or transaction expenses.

Next in the series will be a discussion of the due diligence process.