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stipulates other provisions that the The LOI are. While both are important steps
parties need to agree on to reach a in the process to sell a business, they
successful closing. An LOI usually serve different purposes. Understand-
includes the following: is a true offer ing how the IOI and LOI function and

o Purchase price and payment to acquire the company and their usage helps business owners
navigate the sale process.
terms: The LOI includes the usually contains binding and Business owners should note
proposed purchase price or the that the explanations represent
specific method for determining exclusive provisions. common ways IOIs and LOIs are
it. It may also specify the form of used in the process to acquire/sell
payment, such as cash, stock, or a company. However, every process
a combination of both, and any
conditions or adjustments related is different. Many buyers (and
to the price. It is important to note that an LOI their advisors) will deviate from
does not legally oblige either party to the approach described, sometimes
a transaction, but it usually contains because they are unfamiliar with
o Transaction structure: The LOI
outlines the proposed structure provisions such as confidentiality and this process but sometimes, they
of the transaction, whether it is exclusivity which are legally binding deviate intentionally. For example,
an acquisition of assets or shares, for a period of time. Just like the ro- we commonly meet business owners
a merger, or another form of mantic couple who get engaged because who have a potential buyer pursuing
combination. they intend to get married, the potential them, taking up a lot of time
buyer and seller at this point sign the and asking for large amounts of
o Due diligence: The LOI may include LOI because they intend to make the sensitive information, but without
a provision regarding the scope purchase/sale transaction happen. having provided an IOI. Some
and timeline for conducting due Many business owners do not fully buyers purposefully adopt this tactic
diligence, which is the process understand the importance of the LOI to gain information and leverage
for the potential buyer to conduct in the sale process. A well-prepared over the potential seller without
its final review of the target LOI should address most if not all the having to disclose how serious they
company's financial, legal, and points and issues that are material to are about paying for the target
operational details to assess its making the transaction happen. LOIs
value and risks. company. Applying the IOI and LOI
are usually fully negotiated, meaning tools as described in this article will
the potential buyer and seller and help business owners avoid this
o Conditions to closing: The LOI their respective advisors have iden-
typically lists the key conditions common situation. N
that must be satisfied before the tified and reached agreement on the
transaction can be completed. These important points and provisions of the Patrick Ungashick is the CEO and
conditions may include regulatory proposed transaction. In this manner, founder of NAVIX Consultants. He is
approvals, financing arrangements, the LOI serves as the outline for the nationally recognized as the authority
shareholder approvals, and any final document used to conclude the on exit planning for business owners.
other necessary consents. transaction, often called the Purchase Patrick is also the author of two books
Agreement (PA) or Purchase and Sale to help owners get ready for their
o Confidentiality and exclusivity: Agreement (PSA). exit: Dance in the End Zone, and the
The LOI often contains provisions Once an LOI is signed, both parties award-winning A Tale of Two Owners.
to ensure confidentiality of the typically engage in their final due dili- Patrick can be reached via email at
information shared during the gence and preparations to conclude the pungashick@navixconsultants.com.
negotiation process. It may also transaction. This final stage consumes
include an exclusivity or "no-shop" a lot of time and money, and raises This article should highlight for business
clause, which prevents the target everybody’s expectations that this deal owners the necessity of engaging experienced
company from seeking alternative is going to happen. An effective LOI advisors to guide them through the process,
buyers for a specified period while starting with preparing themselves and their
negotiations are ongoing. reduces the risk that the transaction company for exit, all the way up to the final
falls through because of foreseeable or closing if selling the company is the exit
avoidable reasons, and saves all parties
o Termination: The LOI outlines the strategy. Tools like IOIs and LOIs are important
circumstances under which the time, money, and stress. steps in the sale process, and clear examples
letter may be terminated, such as Conclusion of the need to conduct the process effectively
or risk a wide range of negative outcomes. At
if the parties are unable to reach NAVIX, we have helped hundreds of business
a definitive agreement, if the due It is understandable that the IOI owners plan for and achieve happy and
diligence reveals unfavorable and LOI are often misunderstood successful exits. Let us know if you want to
information, or if certain and even confused with each other, discuss our exit goals or questions and see if we
conditions cannot be met. especially how alike the two acronyms can be of assistance.

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