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nAVIGATING m&a tRANSACTIONS
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Buying or selling a business is a very time consuming, data-intensive and complex process that can be a daunting task for senior executives that already have enough responsibility.
After the successful origination, initial conversations and exchanges of materials, the prospective buyer proposes an indication of interest which outlines the general terms and conditions for the intended transaction.
If the vendor is amenable to the terms and believes the buyer is credible then, based on further exchanges, the prospective buyer would then submit a letter of intent which can take the form of a firm bid or offer.
To close the transaction, the terms of the letter of intent would find its way to a formal sale and purchase agreement.
Used together these are the key documents exchanged at various stages during the M&A process which incrementally become the backbone of the transaction.
Below is an illustration summarizing each in a generic sense.
After the successful origination, initial conversations and exchanges of materials, the prospective buyer proposes an indication of interest which outlines the general terms and conditions for the intended transaction.
If the vendor is amenable to the terms and believes the buyer is credible then, based on further exchanges, the prospective buyer would then submit a letter of intent which can take the form of a firm bid or offer.
To close the transaction, the terms of the letter of intent would find its way to a formal sale and purchase agreement.
Used together these are the key documents exchanged at various stages during the M&A process which incrementally become the backbone of the transaction.
Below is an illustration summarizing each in a generic sense.
Indications of Interest ("IOI") are typically written before the prospective buyer is given any substantial or confidential information with a purpose to define the general scope of the deal in terms of type of transaction (asset or share purchase), valuation range, payment terms, conditions to be met as part of the transaction and any significant assumptions behind an eventual offer.
This will insure both the buyer and the seller understand each other's mindset concerning the deal conditions and will play an important part in determining if the buyer will be asked to continue to the next round.
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Buyer's perspective,
Seller's perspective,
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Letter of Intent ("LOI") is a more detailed document which defines the offer with greater precision including price, deal structure, valuation, payment considerations (cash, stock, escrow), closing date and conditions, required binding exclusivity period, management and employees to be retained, compensation, additional due diligence required, disclosure agreements, etc. Although an LOI does not necessarily bind the parties to consummate the transaction, damages can be awarded to either party for failure to act in good faith which is typically defined in the language therein.
Sale and Purchase Agreement ("Purchase Agreement" or "SPA") is the final binding document executed between the buyer and the seller which supersedes any previous IOI or LOI and is prepared by either the buyer's or seller's counsel. In addition to outlining the purchase price it will have a detailed list of definitions used in the agreement, post-closing purchase price adjustment mechanisms and time frames to deliver final statements and adjustment sheets, amount to be put in escrow, representations, warranties, indemnifications, basket clauses, etc. Appended to the SPA will be the full set of schedules of the disclosure material and contracts on which the representations and warranties would be claimed upon.