Twenty years ago, you could take the name Letter of Intent literally. It was a representation from two well-intended parties that they had every intention to conduct a transaction.
It was irrelevant that the LOI was non-binding because it was ethically binding. The standard was unless there was a material discovery/change that both parties had every intention of going forward with the deal as outlined.
Oh, how things have changed (digressed).
Today it is not uncommon for the LOI to be referred to as a “hunting license” to refer to buyer conduct. The buyer may simply be information gathering (legally) rather than pursuing with an actual intent to acquire. Buyers also use LOIs to secure an exclusivity period to block others while they consider the opportunity. A less than scrupulous buyer may issue three LOI's to block others while they determine which one of the three that they really want to acquire.
Granting an exclusive is a critical step for sellers that should not be taken lightly. It requires the seller to disengage with all other interested parties for a period of time. This period of time should be as short as possible to speed up the transaction and to ascertain whether there is real intent or not.
The substance of LOIs has declined dramatically in many cases too. In many cases the buyer presents a very rudimentary one-sided document that covers their needs including price, timing, confidentiality and exclusivity and that is it.
Our firm takes the exact opposite approach with LOI's. We inform our buyers of our enhanced expectations day one.
We strive to outline and define all key deal points in the LOI. The easy ones, the moderate ones, the difficult ones and the contentious ones.
Why would we do that?
- We are a no-nonsense firm that does not waste anyone's time.
- We get a much clearer read on the seriousness of the buyer.
- Most importantly, deal points are inversely proportional between the LOI stage and the due diligence/document drafting stage. Remember that 70% - 80% of deals fail and we would suggest incomplete LOIs are a primary reason why. There is a saying that absolutely galls us. “We will work it out during due diligence”. That is nothing more than being conflict averse and kicking the can down the road. One-dimensional brokers think that getting an LOI increases their chances of earning a commission.
Example – let's assume that there are 20 deal points to resolve and document in order to successfully close a transaction.
If 18 are agreed to and defined at the LOI stage that is 90%.
If 4 are agreed to and defined at the LOI stage that is 20%.
Our experience suggests that if you have a meeting of the minds and a mutual commitment on 90% of the deal points your probability of getting the deal closed is extremely high.
The reason for that is because due diligence and document drafting becomes mechanical and methodological. It is simply a follow through on what has already been determined.
As long as the seller fully disclosed during the LOI stage, there should not be any surprises or disruptions during due diligence.
Then the LOI terms become a very clear framework for the drafting of the purchase documents.
Again, no surprises and no reason for contentious conduct.
Compare that model to the other part of this example with only 20% predetermined.
20% may not be square one but if it isn't it sure is square two.
Our firm operates under the philosophy of “get out in front and stay there”.
90% is farther out in front than almost everyone conducting transactions.
The best deal we ever did resulted in an 18-page LOI. I went back and counted over 50 deal points or preventions that it achieved. The rest of the transaction was nothing more than putting a bow on it and wrapping it up in a harmonious and very time efficient manner.
Take control of this stage with clear expectations for your LOI and your achievement level will be very impressive and successful.