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A Sample Letter of Intent For Your Merger or Acquisition

6 minute read

Mergers and acquisitions are some of the most exciting times at an organization. With so much capital at stake, it is important that your organization handles the process correctly. And handling the process correctly includes creating, using, and delivering a letter of intent.

Now, you might be asking: what is a letter of intent?

Well, in a merger or acquisition a letter of intent is used to determine the terms and the timing of the deal, as well as making sure that the seller will stop talking with other buyers.

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If during the next part of the process, where the seller goes through due diligence and they buyer acquires capital to make the purchase, goes smoothly, then the transaction will be complete.

However, don’t get confused about the enforce-ability of the letter. A letter of intent is not a guarantee. It isn’t final. If the deal falls through and goes to court, the letter of intent will not hold up as any sort of contract or guarantee.

Letter of Intent For Your Merger or Acquisition

Points of the letter of intent, such as confidentiality, could potentially provide legal trouble in court, but the overall deal will still not be finalized through this document.

So, why is the letter of intent important?

Well, it lays out the foundation for the final deal that will be struck.

Think about when you go to a car dealership, and you see the numbers listed on the cars. That number lays the foundation for where you will start the negotiation process. It is the starting point for where the final deal will end up.

Letters of intent are pretty similar to that!

Not only do they provide a starting place as far as pricing and timing, but as mentioned before, they also allow both the buyer and seller to create stipulations that protect themselves throughout the remainder of the merger and acquisition process.

For buyers, the letter of intent is important because it allows them to have an exclusivity period where the seller won’t talk to any other buyers on the market. This is the equivalent to taking your house off the market while someone does a final check of the property before signing on the dotted line.

Letter of Intent For Your Merger or Acquisition

For sellers, this letter of intent is equally important in protection. It can provide confidentiality protection of both parties when discussing sensitive information. If this particular deal was to fall through, you wouldn’t want the old buyers to give information to new buyers that could ruin your negotiation. Also, leaked information about the inner workings of your company could hurt your public image and brand, which could decrease your valuation in future attempts to sell.

What should you include in your letter of intent?

Before we dive into the nitty gritty of what details you should include in your letter of intent, make sure to download our sample with the button below:

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There are standard things that most companies always include in a letter of intent. However, you will want to check with your corporate counsel, law firm on retainer, or attorney, to ensure that the specific items on your letter of intent make sense for your situation.

We aren’t attorneys, only HR experts. Because of this, and the tons of capital and jobs on the line with a merger or acquisition, it is extremely important to review documentation with a legal professional.

Okay, let’s dig into it…

It is common for a letter of intent in a merger or acquisition to include the following sections:

  • Purchased Assets
  • Assumed Liabilities
  • Purchase Price
  • Pre-Closing Covenants
  • Conditions To Obligations
  • Due Diligence
  • Confidentiality
  • Non Competition
  • Employees
  • Exclusivity
  • Public Announcement
  • Expenses
  • Indemnification

The letter will also include basic contract boilerplate language, asking for signatures and identification of the two parties for which the letter of intent exists between.

Letter of Intent For Your Merger or Acquisition

Let’s dig into each section a little bit deeper to understand the purpose of it, as well as how it will apply specifically to your organization.

Purchased Assets: This part of the letter of intent in a merger or acquisition refers to the purchasers intent to purchase all of the assets belonging to the sellers company at the point of transaction. This means that the purchaser can’t just buy part of an organization, or just the intellectual property, but all of the organization’s assets. This includes equipment, intellectual property, records, office locations, etc.

This is typically standard, but there are obviously situations where the purchaser and seller might agree to not purchase all assets. In that case, you would want your counsel to draft this section of the letter to show that.

Assumed Liabilities: This part of the letter determines how liabilities will be handled according to the transaction. Generally, the purchaser agrees to assume all liabilities and obligations of the selling business after the purchasing date. This is to protect the purchasing company from taking on any costly liabilities or obligations the occurred before the actual purchase of the organization that they may have been unaware of at the time.

Letter of Intent For Your Merger or Acquisition

Again, the above language is standard, but the purchaser might agree to take on any liabilities or obligations that occur as part of the contract. If so, you will want your counsel to take this into consideration when drafting the letter.

Purchase Price: This section of the letter is fairly cut and dry. It states what the purchase price will be of the selling business, and how and when that amount should be paid out. Some deals will require a full cash amount at the time of transaction, other deals might have a 2 year payment plan, or not require the funds to be completely in cash.

Pre-Closing Covenants: This section of the letter contains promises that the purchaser and seller make to each other before the transaction is complete. They can include a promise on both sides of the deal to obtain all licenses and government certificates, as well as a promise by the seller to continue to run the business as it has been run in the past.

Conditions To Obligation: This section of the letter describes the obligations of the purchaser and seller to finalize the deal unless certain factors have not been met, such as government approval, licenses, or certificates.

Due Diligence: The due diligence process is very important to the success of a merger or acquisition. During this process, the purchaser audits every aspect of the seller’s business to ensure that the deal will be successful in the long run. In this section of the letter of intent, the seller agrees to cooperate with the purchaser’s auditors.

Confidentiality/Non-Competition: This is such an important part of the letter of intent in a merger or acquisition. Its purpose is to keep the due diligence information the purchaser finds during this process confidential, either until the deal is finalized, or forever if the deal doesn’t go through. This section can also require that the purchaser does not compete with the seller if the deal doesn’t go through, based on the information they acquired during the due diligence process.

Employees: This section of the letter of intent is very cut and dry, and similar to the confidentiality/non-compete section as well. It basically states that the purchasing organization will not try to poach employees away from the selling organization under any circumstance leading up to the transaction, or if the deal falls through.

Letter of Intent For Your Merger or Acquisition

Exclusivity: This section of the letter guarantees that the seller will not entertain any other purchasers while the due diligence and final negotiations of the deal are taking place. In trade for this exclusivity, the purchaser will generally have to agree to some sort of financial incentive to the seller if they eventually back out of the deal.

Public Announcement: Since mergers and acquisitions are generally announced to the press at some point in the finalization of the deal, this section determines how the deal will be announced, and who will be responsible for the creation of the announcement. Generally both parties collaborate on this.

Expenses: This section states that both parties will be responsible for all of their own expenses and fees associated with the merger or acquisition.

Indemnification: This section states that the seller of the business understands that the purchaser will not have any liability in paying any third parties that helped assist the seller in the M&A deal, such as legal expenses or auditors.

The Final Say

If you hit all of these areas, you'll be well on your way to having a great letter of intent. Now, it's important for us to mention that M&As are very tricky events. You need to work closely with your team, the other company's team, management, and - most importantly in some senses - your legal team. 

Download our HR Guide for Mergers and Acquistions!

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