The Letter of Intent (LOI) is one of the most commonly used tools for moving a deal forward. Once you receive a signature on the LOI from the seller, you have reached a significant landmark on the acquisition roadmap. Despite this milestone, there is still a lot of work to be done before the deal closes. Here are four things to do after you sign the LOI.
1. Formal Due Diligence – A signed LOI indicates the start of a formal due diligence. Up until this point, your due diligence has been preliminary and generally just enough information for you to put together an initial offer. After the LOI is signed, the Seller will provide much more detailed information about their company, based on your requests. With the release of more detailed information, you are getting your most in-depth look at the seller so you can further evaluate the company’s strengths and weakness.
2. Reassess Valuation – Due Diligence findings can affect the valuation of the company after the LOI is signed. With fuller access to the seller’s books, you will be able to plug new numbers into the methods you used for your initial valuation to arrive at more accurate figures. As a strategic acquirer, it is important to remember that numbers are not everything, you must consider how much the opportunity is worth to you.
3. Negotiations – Although the LOI provides a guideline for the deal framework, there will be new findings from due diligence that the parties may want to renegotiate. You may also negotiate specific areas like employee contracts and intellectual property rights that may not have been covered in the LOI. A commonly negotiated area is how the total purchase price will be structured, such as consideration (cash, seller’s note, buyer’s stock, or debt) earnouts, escrows and purchase price adjustments.
4. Closing the Deal – As you go through due diligence and negotiations your legal team drafts the definitive purchase agreement which includes the legal terms and details of the acquisition. This is a binding agreement to acquire the company. Depending on the circumstances, you will either sign the purchase agreement and close the deal simultaneously (most common for privately-held acquisitions), or sign and close subsequently, which is most common for public companies that require regulatory approvals and disclosures.