If you’re selling your agency, the letter of intent sets the stage for the entire transaction.
The letter of intent (LOI) is a declaration of one party’s aim to do business with another. In an agency merger or acquisition, it summarizes material terms of the transaction such as deal structure, purchase price, timelines, and consent requirements.
Any of these terms could verify the transaction is worth pursuing, or, conversely, signal a potential deal-breaker. Better to identify any problem areas at the LOI stage before significant time and resources have been dedicated to drafting and negotiation of the definitive agreements.
A clear and comprehensive LOI acts as a road map for much of the due diligence that lies ahead. And while LOIs are preliminary, meaning most of the elements they contain are non-binding, incomplete or confusing terms could risk adding time and expense to your transaction.
While an LOI reviewed by your lawyer improves your chances of a smoother agency sale, it behooves any agency owner to understand what is and isn’t covered. Here are the key elements in a letter of intent, along with common mistakes to avoid and strategies for making the most out of your negotiations.
A Letter of Intent is a Buyer’s Opening Statement
Negotiating the sale of your agency is time-consuming, but a strong LOI is a solid first step that can make the rest of the process more straightforward.
Your LOI is a chance to see whether there’s potential for a long-term relationship with another agency looking to merge with or acquire yours. Is the offering price fair? Are there any terms or conditions that you would object to? What obstacles need to be cleared in order to close? What would make this a good fit? What would make it completely unworkable?
And because the most essential elements of an LOI (like price and deal structure) are non-binding, both parties are free to change their minds and walk away from the deal or continue negotiations to work something out.
Agency Housekeeping Before Pursuing a Letter of Intent
Prior to receiving an LOI, compile your most basic business metrics including your agency’s finances over the past few years (revenue, costs, debt, liabilities, etc.). The more you understand your firm’s finances, the better equipped you’ll be to determine if an offer is fair.
You also need to be prepared to tell a compelling story about what makes your business an attractive acquisition (healthy demand, market share, profitability), what the industry landscape looks like, and opportunities and challenges that await.
Collecting this information at this stage makes it easier to prepare for the post-LOI process, which will then require producing truckloads of information, including:
Three to five years of financial statements and tax returns
Lists of key customers and vendors
Copies of all major contracts
Review of leases and loans
An employee census, and so on
Having certain key information about your agency readily accessible can make it easier to negotiate an LOI.
A Good LOI Should Develop Trust Between Buyer and Seller
As a preliminary document, a letter of intent is structured to be less formal than a full agreement. Its main purpose is to outline the key terms of the proposed transaction.
To that end, an LOI should be clear and candid so both parties can determine whether a full purchase agreement is worth pursuing. The LOI can serve as a bellwether to save both parties considerable time, effort, and money in the event you’re too far apart on price, structure, or any other aspect of the transaction.
Additionally, the letter of intent is an opportunity to establish trust and understanding with a potential buyer. If the buyer starts going back on what you agreed to in the LOI, can you count on them when real money is on the line?
Missteps That Could Leave Your LOI DOA
While an LOI is preliminary and non-binding, you could derail the process if certain elements are handled poorly.
Here are some of the most common mistakes we’ve seen when reviewing letters of intent:
- Not identifying the deal-breakers. An LOI’s chief function is to answer foundational questions and flag potential sticking points. Maybe you can’t live with a non-compete. If it’s not clear in the LOI, you could waste thousands of dollars drafting a purchase agreement before noticing a non-compete clause and realizing it’s a non-starter.
- No clarity about deal structure. Deals can be completed in many ways. Simply saying that the Buyer will purchase the Seller’s business doesn’t provide enough information. Is it an asset sale? A tax sale? A merger? Each of these methods has different tax consequences and different documentation requirements. If possible, the desired deal structure should be identified in the LOI.
- Lack of clear payment terms. It’s common for an LOI to include a set price but overlook the details on how it will be paid. Will you be paid in a lump sum or over time? Is there interest on the deferred portion? Will it be paid in stock? Is there collateral involved? Are you being asked to finance a portion of the purchase price? These details need to be covered.
- Failing to make it expressly non-binding. Perhaps the most glaring error we see in an LOI is when it doesn’t contain language specifying that this is a non-binding document. If this sentence is not included, it is going to be binding and that makes future negotiation much more difficult.
What Are the Binding Parts of an LOI in an Agency Sale?
Most aspects of an LOI, like price, are likely subjects of further negotiation and are therefore non-binding. But a handful of elements are binding.
The binding parts of an LOI include:
Exclusivity. This clause determines the period of time during which both seller and purchaser aren’t talking to other potential buyers or sellers. This exclusive state typically lasts between 60 and 90 days. However, a larger deal might take longer to hammer out, so the exclusivity period is extended accordingly.
Confidentiality. This clause spells out the buyer’s obligation to keep the seller’s information private.
Nonsolicitation. While not in every LOI, it can be appropriate in some contexts. This clause prohibits the potential buyer from poaching any of the seller’s employees or clients if the merger or acquisition falls through.
Termination. This provision describes the circumstances under which the LOI automatically terminates or when either party can unilaterally terminate negotiations.
A Well-Crafted Letter of Intent Makes it Easier to Finalize Your Sale
An LOI is an outline for your agency’s prospective sale. The more detailed and accurate that outline is, the easier it is for all parties to understand the overall framework of the deal.
A properly drafted letter of intent empowers your lawyer to be more efficient, cost-effective and better advise you on the potential sale. It also gives you a head start in the process of selling your agency and improves the odds of a successfully closed deal.