IOIs, LOIs and Definitive Agreements

IOIs, LOIs and definitive purchase (or sale) agreements are used during the course of selling your business so it is important to understand the characteristics of each one and when/why it is used. It is critical to employ professionals in reviewing and negotiating these documents - this is not a good skill to attempt to Do It Yourself!

Indication of Interest or IOI is a non-binding letter from a prospective buyer and puts into written form a summary of the terms and conditions including price the buyer is offering for your company. Sell Side Quarterbacks goal is to find multiple buyers who will submit an IOI to be reviewed with you and then go back to each prospective buyer and encourage them to improve their offer in a two or three round process that usually takes 7-14 days and results in a single buyer being selected who will then submit an LOI.

Letter of Intent or LOI can be a binding letter with penalties for withdrawing without cause but for transactions under $50 million, the LOI in practice is usually a non-binding letter declaring the preliminary commitment of the buyer to acquire the company. The letter outlines the chief terms of a prospective deal including price, method of financing the transaction, timing of the close and certain stipulations, requirements, timelines, and the parties involved and in most cases a "no-shop" agreement where the seller is restricted from marketing the company for sale while the LOI is in effect. The LOI forms the basis of what will ultimately become the definitive purchase agreement.

Why is the form of the initial agreement important to you?

IOIs are non-binding and are the weakest form of agreement - you will be taking your company off the market through a no shop agreement while the buyer can walk away with no penalty.

Sell Side Quarterbacks will do our utmost to secure a binding LOI which is a stronger form of agreement.

The Definitive Purchase Agreement is the binding contract between the buyer and as such is the most important document in the course of the transaction.

A Definitive Purchase Agreement (DPA) is a legal document that records the terms and conditions between two companies that enter into an agreement for a merger, acquisition, divestiture, joint venture, or some form of strategic alliance. It is a mutually binding contract between the buyer and seller and includes terms and conditions such as asset purchased, purchase consideration, representations and warranties, closing conditions, etc.

The Definitive Purchase Agreement supersedes all prior agreements and understandings – both oral and written between the buyer and seller. A DPA is sometimes known as a “Stock Purchase Agreement” or “Definitive Merger Agreement.” For a more in-depth description of a DPA and the typical clauses of the agreement, click on this link.