The Letter of Intent (LOI) is an important milestone on the M&A process and is used to crystallize the most important terms of the deal. While the LOI is an important legal document, it also brings a new level of commitment and resolve to the deal. The LOI can be “narrow” or “comprehensive.”
A narrow LOI will have only a few terms. With a narrow LOI, there are more opportunities for the deal to fall apart as the M&A process moves forward because you haven’t taken the time to discuss many of the terms of the transaction early on. You will also spend more time and money drafting definitive purchase agreements later on. On the other hand, a narrow LOI can be used to quickly move into a period of exclusivity (typically 30-60 days) and get people excited about the deal.
A comprehensive LOI lays out all the terms. In this case, it’s more likely that the deal will fall apart early on because both parties have difficult agreeing to all the terms. Some prefer not to use a comprehensive LOI for fear that they will get bogged down with the details early in the relationship and the deal will never happen. While this may be true, if you do sign a comprehensive LOI, it will make drafting definitive documents easier and reduce the chances of deal failure later on.
Which one is best?
Ever transaction is different so it varies across the board. Both narrow and comprehensive LOIs have been used successfully to execute deals. Narrow LOIs are typically used by those who are very sensitive to upfront costs and don’t want to spend lots of money with lawyers and legal expenses.
Recently, comprehensive LOIs have become more common. While you have a higher upfront cost to draft a comprehensive LOI, you are less likely to spend money and time drafting legal documents that end up being useless because the deal blows up down the line.
On the other hand, there are deals where clients throw out 3-4 terms in a term sheet to jump-start the process. They are willing to take the risk and figure it out as it goes without incurring the up-front legal expenses.
This post is based on our recent webinar “Contemporary Legal Issues for Mergers & Acquisitions” presented by John McDonald, a Partner at Troutman Sanders.