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When an M&A buyer has done enough due diligence to satisfy a decision to proceed, it provides the seller with a formal Letter of Intent (LOI). An LOI is a letter from the buyer that states the broad terms of what a definitive agreement might look like, including the purchase price and form of consideration. (An LOI is usually, but not always, non-binding.)
The purpose of the LOI is crystalize the discussions up to that point and to provide the seller with a clear articulation of what the buyer is prepared to offer.
A non-binding LOI sets the stage for a more detailed due diligence process. After an LOI is received, the seller usually sets up a data room for the buyer and provides further detail and requests for sensitive documents.
For example, when Sun Capital Partners (a PE firm) sought to acquire Rag Shops (a specialty crafts retailer advised by SunTrust), Sun Capital submitted a non binding LOI that stated the following:
… We would like to thank Rag Shops, Inc. and SunTrust Robinson Humphrey Capital Markets for providing us with the opportunity to review the Company's operations. After performing a significant amount of due diligence, which included meetings with management, a detailed review of the Company's operations, and a review of the Company by both our attorneys and accountants, we remain enthusiastic regarding a potential acquisition of the Company. As such, we are pleased to present you with this non-binding letter of intent whereby Acquisition would acquire control of the Company through either a tender offer for the outstanding shares (including options) of the Company or through a merger.
In the LOI, Sun Capital presented an offer of $4.30 per share and explained that while they’ve done a lot of due diligence already, they'll need to do a lot more:
Acquisition will pay consideration of $4.30 per current share outstanding. … While Acquisition has completed a significant amount of due diligence to date, it plans to conduct further due diligence to its sole satisfaction, which will include, but not be limited to (i) distribution center and retail store visits, (ii) meetings with management, (iii) a review of the Company's books, records and legal documents by Acquisition, as well as by its legal, accounting and other advisors, (iv) environmental reviews, (v) a complete review of all of the Company's assets, and (vi) satisfactory resolution of specific issues that may arise during the course of due diligence.
In addition, Sun Capital provides a 30-day timetable for moving from an LOI to a definitive agreement:
Acquisition intends to provide the Company with a mark-up of the purchase agreement promptly upon the execution of this letter of intent. Acquisition expects to (i) complete due diligence and (ii) sign a definitive merger agreement with the Company within approximately 30 days after the execution of this letter of intent. Acquisition is willing to work expeditiously in the transaction and is confident it can meet this time frame with mutual cooperation and commitment from the Company.
Here’s another example of a non-binding letter of intent from Omni Energy Services' acquisition of Preheat Inc.
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