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Why Negotiating the Tough Stuff Upfront in a Letter of Intent is Crucial in M&A Transactions

November 14, 2024

When you're selling your business, the most challenging negotiations are the ones that often get pushed aside, but they are the ones that should be tackled upfront. 

As seasoned M&A advisors, we know that the real story of a Letter of Intent (LOI) often lies in what isn't written rather than what is. The gaps and omissions can be just as critical as the clauses that are explicitly stated, shaping the final outcome of the deal in ways you might not anticipate.

Look for the Devil in the Details

When it comes to reviewing an LOI, details matter. The inclination to skip over the nitty-gritty can be strong—after all, it’s just the beginning of the process, right? Wrong. It’s essential to hammer out the specifics at this stage to avoid complications later. A buyer might resist detailing certain items upfront, and sellers might not want to spend the time. But as experience dictates, creating alignment is well worth the effort.

Be wary of broad terms like “generally accepted practice” or “standard adjustments.” What a buyer considers “standard” might not align with your expectations or the spirit of your negotiated deal. It’s these vague phrases that can lead to disputes and costly negotiations down the line.

Treating the LOI as merely a formality can be a costly mistake. It's imperative to negotiate the "tough stuff" up front in the LOI, and here's why.

1. Establishing Clear Expectations Early On

The LOI is the first formal communication between the buyer and seller regarding the transaction. By addressing critical and potentially contentious issues upfront, both parties can establish clear expectations. This includes key terms like the purchase price, payment structure, any liabilities being assumed, and the scope of warranties. When these elements are discussed early, it minimizes the chances of misunderstandings or disagreements later on, which can derail the deal or cause it to fall apart.

2. Reducing the Risk of Deal Fatigue

M&A transactions are notorious for their complexity and the time they require. If significant issues are left unresolved in the LOI, they will inevitably resurface during the due diligence or final negotiation stages, often leading to protracted discussions and delays. This can result in deal fatigue, where one or both parties become frustrated and lose momentum, increasing the likelihood of the deal collapsing. Negotiating the tough points early helps maintain momentum and reduces the risk of fatigue setting in.

Sell Smarter, Not Harder – Partner with Benchmark International

3. Enhancing Negotiating Leverage

The initial stages of negotiation, including the LOI, often provide the best opportunity for both parties to exert leverage. Once the LOI is signed, the buyer typically gains access to sensitive information about the target company, which can shift the balance of power. If the tough issues are not addressed before this point, the seller may find themselves in a weaker position to negotiate favorable terms later on. By securing an agreement on critical issues upfront, both parties can negotiate from a position of strength.

4. Avoiding Surprises During Due Diligence

Due diligence is a critical phase in any M&A transaction, where the buyer verifies the information provided and uncovers any potential risks. If the LOI glosses over tough issues, they may emerge as significant obstacles during due diligence. This not only prolongs the process but can also lead to renegotiations or even the termination of the deal. Addressing these issues in the LOI ensures that both parties are on the same page from the outset, reducing the risk of unpleasant surprises later on.

5. Building Trust and Cooperation

Negotiating tough issues upfront in the LOI can foster trust and cooperation between the buyer and seller. It demonstrates a commitment to transparency and a willingness to address potential challenges head-on. This sets a positive tone for the remainder of the transaction, making it more likely that both parties will work collaboratively to overcome any obstacles that arise. A strong foundation of trust is crucial in M&A transactions, where the stakes are high and the complexities numerous.

6. Saving Time and Resources

While it may seem counterintuitive, spending time negotiating the tough stuff upfront can save considerable time and resources in the long run. By ironing out significant issues early, both parties can avoid lengthy renegotiations later in the process. This can lead to a more streamlined and efficient transaction, reducing legal fees, advisory costs, and the overall duration of the deal.

Conclusion

In the fast-paced and high-stakes world of M&A, the importance of negotiating tough issues upfront in the LOI cannot be overstated. It sets the stage for a smoother, more efficient transaction by establishing clear expectations, reducing the risk of deal fatigue, and avoiding costly surprises. Moreover, it enhances negotiating leverage, builds trust, and ultimately saves time and resources. For these reasons, M&A professionals should always prioritize addressing the tough stuff early in the negotiation process, ensuring that the LOI is a strong foundation rather than a mere formality.

Author

Andre Bresler, Managing Partner, Benchmark International

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