Making Sense of the Letter of Intent

Making Sense of the Letter of Intent

We first explain what can be included in an LOI, then go into the standard requirements and suggested best practices further down the page.

An Letter of Intent is often misunderstood in the sale process of a company.

The purpose of an LOI is to establish a general framework for the price and key terms of a potential transaction.

An LOI would often be executed following a verbal offer of price and terms from a buyer prospect and would be executed before due diligence starts.

While an LOI resembles a written contract, they are typically non-binding on the parties in their entirety. You could think of it as a letter of understanding to continue the process.

It is important to make sure that a potential buyer submits
an LOI before allowing them to start the due diligence process. The main reason is to ensure that you have a general understanding and agreement with the terms of their offer.

There is no sense in stalling the sale process for 90 days and giving exclusivity to negotiate contract terms with only one buyer if their terms are not going to be acceptable to you.

Why you should request an LOI

The act of submitting an LOI requires higher level approval and signature, which indicates that it is a serious offer and that the buyer representative has the appropriate authority. At the same time, the buyer is not committed to deliver those terms and is not committed to complete the transaction.

When both sides are acting in good faith, an LOI sets up the outline of an offer and allows you to contemplate whether you want to open up your company to an exclusive period of due diligence where the buyer prospect would gain complete access to your company's financials and operations.

When sellers don't request an LOI

In an informal sales process where both parties know each other well, some sellers feel that they can gauge both the motivation and indicative terms without requesting an LOI from the buyer. We believe these situations make it even more important to require an LOI.

LOI Content

The basic provisions of an LOI typically include details of the deal structure, its terms and conditions, exclusivity and obligations of the parties. The financial terms comprise the price and terms of the deal, which may include cash, stock, earn out, warrants, options, minority or majority ownership. It should also include an overview of financing sources and leverage for the deal.

It will often also set out a general timeline of when the agreement and contract would be finalized if due diligence is completed to the buyer prospect's satisfaction.

Nonbinding Nature

Even though LOIs are considered serious agreements, many of the most important parts of the agreement are not binding. Often the only binding provision is the non-disclosure or "no-shop" provision.

Exclusivity Agreements

In consideration for the time, effort and money spent by the potential buyer during the due diligence process, exclusivity agreements are standard. The seller agrees not to market the business to other interested parties which as a consequence provides the buyer with some sort of security against competing offers. Different terms essentially all mean the same: "no-shop", "stand-still" etc.

Unfortunately for the seller, if the deal falls through after the due diligence stage, it inevitably means a loss of momentum in the sale process. This is why it is so important to have a clear understanding of a buyer's track record, financial means and motivation to complete the deal in a timely manner, as well as have some other buyer prospects in reserve if the current buyer falls through. Without that assurance, many sellers tie themselves into "no-shop" agreements with buyer prospects that talk a good game, but are unlikely to ever get to the finish line.

Reliable Financial Data

Even though an LOI is a significant step towards the sale of your business, it is just the first step in negotiations. As price and terms of the LOI are not binding, this is when the work really begins to provide accurate and reliable data in a timely manner. If you have an acceptable buyer prospect, you need to increase their confidence in your company by pre-empting their due diligence requests with thorough preparation and a secure data room available to them with information they are likely to request.

And a final note. If a buyer requires you to disclose sales forecasts before the LOI is signed, make sure that they are reasonable. If you are too optimistic, the buyer will often use your non-achievement of the forecasts as leverage to renegotiate the purchase price, worsen the terms or both.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.

For further information, visit www.clearridgecapital.com

Anja Ritchie joins ClearRidge Capital’s Team from Frankfurt, Germany

Anja Ritchie joins ClearRidge Capital’s Team from Frankfurt, Germany.

TULSA, OK – September 3, 2009 – ClearRidge Capital, a leading provider of restructuring, merger and acquisition and corporate finance services for midsize companies, has expanded its mergers and acquisitions team with the addition of Anja Ritchie, a professional with industry experience from PricewaterhouseCoopers and Commerzbank in Germany.

Anja was born and raised in Berlin, Germany. She graduated with an MSc from one of the top 3 German business schools, HHL-Leipzig Graduate School of Management, majoring in Corporate Finance and Business Strategy. She earned her Bachelor’s degree in International Business Administration from the European University Viadrina in Germany and the Ecole Superieure de Commerce in Montpellier, France.

Anja worked in the valuation advisory division at PricewaterhouseCoopers in Frankfurt, Germany, where she contributed to a wide range of European MandA deals. Prior to this, she also worked in corporate restructuring and financial modeling at Commerzbank, headquartered in Frankfurt.

Anja met her husband, who is originally from Pryor, Oklahoma while they were traveling in Turkey. After living in Europe for several years, they decided to move back to the US and settle in Tulsa.

According to Matthew Bristow, Managing Director, “Anja adds to the international experience of our team, who between us have lived and worked in over 15 countries around the world. Our clients benefit from a breadth of industry experience and geographic relationships that are unavailable to most Midwest companies. Anja adds to the strength and diversity of the ClearRidge team, as well as bringing new lender, investor and business relationships from Central Europe.

At ClearRidge, Anja’s main focus is research, analysis and financial modeling.

According to Bruce Jones, Managing Director, “The addition of Anja to our team will further strengthen our firm enabling us to expand our services to the growing Midwest market for corporate financial and strategic advice.”

Before Anja embarked upon her investment banking career, she was a professional volleyball player, winning the Berlin Championship title numerous times with her team and placing 2nd in a German national championship. Anja still enjoys playing beach volleyball today, but she now spends more time perfecting her Salsa dancing.

About ClearRidge Capital
ClearRidge Maximizes Enterprise Value as a business, financial and strategic advisor to midsized US companies. ClearRidge’s Directors have completed over 200 MandA transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies. Restructuring includes financial, operational and strategic restructuring. Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital. Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management. We provide top tier advice and relationships with Middle America values.

For further information, visit www.clearridgecapital.com.

Critical Pre-Sale Due Diligence - Maximize Business Sale Price and Terms

Due Diligence preparation is often overlooked, yet is critical to maximizing sale price and ensuring a smooth transaction. Now more than ever.

Credit markets are tight and despite a recent rebound, Mergers and Acquisitions activity is still down.

Buyers are targeting acquisitions - but now with a heightened degree of scrutiny.

Even if a buyer has plentiful cash available, they are still likely to leverage the acquisition to increase their percentage returns.

Leverage brings lenders to the table. Even if lenders are familiar with the deal, they need to provide detailed support for their loan.

With the tighter credit environment, tougher reporting requirements and more stringent data and due diligence requirements, you need to do more today to ensure a smooth sale process.

A report on your company's financial results from your accountant or even an independent auditor is not sufficient.

Your best option is to conduct in-depth analysis of your Company by an independent due diligence expert to identify areas that will have a direct impact on the sale price.

Firstly, a buyer needs a thorough review of your financial accounts and reported financials with supporting detail, consolidated data as well as data by location, product categories and other relevant categories for historical and forecasted periods.

They also need in depth analysis and a report on the quality of earnings, accounting systems, methodologies and compliance with or departures from GAAP. They need to see normalized sales, gross margin, and operating expenses, as well as feedback regarding compliance with debt instruments. They need analysis on AR, Inventory, CAPEX, working capital, debt and coverage, and profitability.

Buyers will also require due diligence on liabilities, operations, tax compliance, legal issues, reputation, industry analysis and forecasts, competition, customers, suppliers, people, PP&E, integration risks, environmental, health, internal controls, lease, zoning and permits, in addition to other business issues.

CLICK HERE for ClearRidge Capital's website section with expanded information on due diligence requirements.

This is not something that is easy to compile and typically requires strong financial modeling skills, trained analytical skills and specific acquisition due diligence and corporate finance experience.

Whether it is a midsized privately held company or a single division of a large public company, it is rare that this data is tracked routinely by the lean accounting staff that is focused on daily operations and normal reporting needs.

Take Action to Better Position your Company

This doesn't need to be an obstacle to a successful sale, but it does take planning and clear forethought. Most sellers proceed too quickly at the start of the process and skip critical steps, only to suffer later on while attempting to close the deal.

Unfortunately for many sellers, starting later in the sale process can reduce the sale price or cause the deal to fall apart.

Your best solution is to prepare a thorough due-diligence report before talking to buyers. Proactively offering answers to their likely information requests not only speeds up the process, but also inspires confidence in the acquisition opportunity.

If you want to secure the highest price and the best terms, you are going to need at least two buyers competing in a confidential auction process.

By providing a due diligence report in advance, you are saving time and also providing potential buyers and their lenders with sufficient information for them to submit an LOI (purchase offer) and close the deal in a timely manner.

Professional preparation also enhances the image of your company.

All rights reserved. Copyright: ClearRidge Capital, LLC, 2009.

Maximizing Enterprise Value as a business, financial and strategic advisor to midsized US companies.

ClearRidge’s Directors have completed over 200 M and A transactions, provided restructuring advice and secured new and replacement debt and equity for companies across the US and Canada.

Mergers and Acquisitions includes buying, selling, merging and valuing midsize companies.

Restructuring includes financial, operational and strategic restructuring.

Corporate Finance includes advisory for raising and replacing debt and equity to provide the lowest cost of capital.

Turnaround, Bankruptcy and Crisis Management services include debtor and creditor advisory, bankruptcy support and turnaround management.

We provide top tier advice and relationships with Middle America values.