Think of the Letter of Intent (LOI) as a starting pistol. Once fired, the race to complete the acquisition as quickly and easily as possible begins. While not legally binding, the LOI shows you’re serious: wait too long before sending one and you risk losing the startup to another entrepreneur.
The LOI is, therefore, a critical part of the acquisition process and the writing of one can seem a bit daunting if you’ve never done it before. Not only must it be written following legal principles, but it must also outline your expectations and still be attractive enough for the founder to accept. Here are some tips to get you started (or skip straight to the template).
What’s the Purpose of an LOI?
An LOI is an offer to Acquire a startup, simple as that. You’re not bound by this offer, but it sets the legal groundwork for later on. If the founder finds it favorable, for example, expect them to hold you to its terms. You risk the deal collapsing if you try to change everything later without reasonable cause (such as troublesome findings during due diligence).
Everything in the LOI is negotiable, so don’t be surprised if the seller rejects it or suggests alternative terms. It’s all part of the negotiation process. Nevertheless, you want your LOI to leave a good impression so ensure everything you include you do so in good faith.
How to Write an LOI
Please ask your lawyer to approve your LOI draft before you send it to the founder. You’re not bound by the LOI, but it can define legal obligations during the acquisition. All the variables should be accurate, grammar and spelling perfect, and your expectations realistic.
#1 Address It to the Entity Selling
You must address an LOI to the person, persons, or other legal entity that has the right to sell the startup. For example, is there a co-founder with a majority stake in the business? Is it wholly owned by another business? At the smaller end, these aren’t big concerns, but just ensure you address the LOI to the person allowed to sell the startup.
#2 Consider a Good Faith Provision
Good faith provisions or covenants are common to enforceable contracts. Since an LOI isn’t legally enforceable, you might think it unnecessary. However, as stated earlier, certain parts of an LOI, such as an exclusivity period, for example, are legally binding. In this case, a good faith provision would ensure both of you perform your obligations for the purpose they were intended and not some nefarious, self-serving aim such as stealing trade secrets. Ask your lawyer for guidance on this one.
#3 Describe the Assets and Liabilities Included
Most SaaS acquisitions are asset purchases, which means you’re acquiring certain assets and liabilities to the exclusion of others. You must specify what these assets and liabilities are in the LOI to avoid any confusion or conflict later.
#4 Describe the Assets and Liabilities Excluded
As in #3, specify the assets and liabilities excluded from the acquisition. If you’re at all unclear of how to word these exclusions, consult your lawyer.
#5 State the Purchase Price
The purchase price is negotiable up until the mutual signing of the purchase agreement. Nevertheless, state a figure that you think is fair and attractive to the founder. You might also include the impact of working capital and outstanding debt repayments, for example.
#6 Include Payment Terms
You should outline how you’d like to pay. If you’re paying a 50% down payment for example, with the rest payable in 12 monthly installments, specify these terms in the LOI. Equally, include any earn-out conditions such as profitability or growth targets along with the period to which they apply.
#7 Include Assumptions, Agreements, and Conditions
Add any other conditions to your acquisition of the startup. For example, the satisfactory completion of due diligence, non-compete and non-solicitation clauses, the retention of key members of staff, escrow agreements, and so on.
#8 State Terms of Exclusivity
To avoid a bidding war, you might specify an exclusivity period in which you and the founder must take all reasonable efforts to close the acquisition. While favorable to you, the founder might resist this if they feel you’ve low-balled their valuation. Again, no harm to include it but expect this to be negotiable.
#9 State the Expiration Date of the LOI
Include the date upon which the LOI expires. Neither you nor the founder wants to become embroiled in a protracted negotiation. If you can’t agree an exclusivity period, the expiration date is the next best thing. You want to reasonably limit the validity of your offer to avoid the prevarication of founders who might be scouring the market for other offers.
Include a confidentiality clause that’s legally binding on both of you. Why? The founder needs reassurance that sensitive information shared between you, such as intellectual property, remains confidential. It protects your interests, too, since the founder can’t draw you into a Dutch auction by revealing your acquisition strategy to the market.
Download Free Letter of Intent Template
Done! You’ve learned what goes into a Letter of Intent and now’s the time to draft one! Create a Letter of Intent now with this free LOI template. Add in anything missing and remember to get a lawyer to review it before you send it to the founder. While generally non-binding, mistakes can be embarrassing and you don’t want the seller to think you’re wasting their time.
For more LOI info, check out the video below from Acquire Academy.