Don’t rush to get a signed letter of intent (LOI) by kicking the can down the road on price. A signed LOI is a significant milestone in the M&A process, indicating mutual interest in an acquisition. The document covers the basic parameters of the deal that both buyer and seller agree to including what will be acquired, deal structure, and pricing.
Unfortunately, far too often in their eagerness to obtain a signed LOI, buyers will avoid negotiating about price by putting a large range in the LOI. While this may speed up the pre-LOI negotiations, I strongly recommend you do not take this approach because it complicates matters as the deal progresses.
Let’s say you put a range of $90 to $100 million. What commonly happens is the seller remembers $100 million, while the buyer remembers $90 million. Unfortunately, in this situation, negotiations can become tense over a document that is supposed to represent a meeting of the minds.
While the price cited in the LOI is nonbinding and will likely change upon your discoveries during due diligence, writing down a specific number or at least a narrow (and realistic) range will help to keep both parties aligned moving forward. Spending time with the seller pre-LOI discussing will save you time and effort and protect your relationship with the seller in the long run.
This article originally appeared in The M&A Growth Bulletin, Capstone’s quarterly newsletter that delivers essential guidance on growth through M&A along with tips and tactics drawn directly from successful transactions completed in the market. Subscribe today to read the current edition and receive The M&A Growth Bulletin every quarter.