The LOI Is Where Sellers Have the Most Leverage. Most Waste It.

For many startup founders, the goal is to sell to a larger corporation and to make a significant amount in doing so. In large part, these are mid-market transactions, and it is crucial for startup founders to understand how, at this stage, the letter of intent (LOI) can protect your sale. Indeed, the LOI is where sellers have the most leverage, but most waste that leverage. The letter of intent looks deceptively simple, but the moment it is signed with exclusivity, the leverage shifts to the buyer.

What should you be thinking about when it comes to the LOI in mid-market M&A, and how can you ensure that you take advantage of the leverage you have as a seller before the leverage shifts to the buyer? There are some key things that you will want to lock in before diligence starts, and Triumph Law can assist you in making certain that you take advantage of the leverage you have before the LOI is signed. Consider the following information, and do not hesitate to reach out to our firm to learn more about how we can assist your startup with the LOI during mid-market M&A.

Understanding the LOI

Before we discuss some of the key ways of using your leverage at the letter of intent, you need a clear understanding of what this document is and why it is used in mergers and acquisitions.

Before a formal contract — which can take a significant amount of time — is drafted between the seller and the buyer (i.e., the startup founder and the larger corporation acquiring the business), the letter of intent or LOI is drafted. While this is a non-binding document that does not have the force of a legally binding contract, as the Long-Term Stock Exchange explains, it is a crucial document nonetheless because it is the preliminary agreement that outlines the terms for the sale of the startup and establishes the framework for future negotiations that will lead to the contract of sale. The essential elements are typically outlined in the LOI, including the parties involved, exclusivity provisions, non-solicitation and non-disclosure provisions, price mechanics, and the overall deal structure.

What You Should Lock in As a Seller Before Diligence Starts 

What should a seller ensure is negotiated and included in a letter of intent before the leverage shifts to the buyer? Given that the LOI is what establishes the framework for the eventual contract, the seller can create favorable terms from which further negotiations can occur. What do you want to lock in with the LOI and before diligence begins? Consider the following:

• Price;
• Exclusivity length, in which 30 to 90 days is standard but exclusivity length can also be shorter or longer; and
• Deal structure, including how you will be paid, the structure of the M&A transaction (e.g., asset sale, stock sale, or merger), handling of risks and liabilities, and other rights and obligations.

Use Your Leverage Before You Sign the LOI

Are you at the LOI stage for a mid-market M&A deal? If so, you should seek advice from one of the startup attorneys at Triumph Law to ensure that you take advantage of the leverage you currently have as a seller. Contact us today.

Source:

ltse.com/