Major Characteristics of a Letter of Intent
An LOI is a crucial document in mergers and acquisitions (M&A), acting as a roadmap for the transaction. While non-binding in most aspects, it includes provisions that can significantly impact negotiations.
1. Non-Binding Nature
Most LOI terms are non-binding, meaning they do not legally require parties to proceed with the transaction. However, key provisions such as exclusivity, confidentiality, and no-hire agreements are often binding.
2. Moral Obligation
Although not legally enforceable, an LOI creates a moral commitment between the parties. Some buyers may exploit this to negotiate more favorable terms later.
3. Preliminary Agreement
The LOI serves as a precursor to the final purchase agreement, allowing both parties to begin due diligence while avoiding the costs of drafting a full contract prematurely.
4. Negotiation Framework
The LOI establishes the primary deal terms. Any undefined terms in the LOI will likely be structured in the buyer’s favor when drafting the purchase agreement.
5. Exclusivity Clause
Most LOIs include an exclusivity period, preventing the seller from engaging with other potential buyers. While this helps buyers, it weakens the seller’s negotiating power.
6. Limited Information and Due Diligence Contingency
Buyers typically have minimal information before signing an LOI. Due diligence may reveal issues that lead to renegotiation or withdrawal.
7. Momentum in Negotiations
Signing an LOI builds deal momentum, allowing parties to identify and resolve potential issues before committing significant time and resources.
Common LOI Problems & Solutions
Problem | Solution |
---|---|
Terms often become less favorable post-LOI. | Define key terms upfront to maintain leverage. |
Undefined terms benefit the buyer. | Ensure clarity on all major deal terms in the LOI. |
Long exclusivity periods weaken the seller’s position. | Limit exclusivity duration and set milestone requirements. |
The LOI reduces seller leverage. | Take time to negotiate the LOI, then move quickly post-signing. |
Issues found in due diligence impact price and terms. | Be prepared with comprehensive documentation. |
Binding vs. Non-Binding Provisions
Most LOIs are structured to be non-binding except for certain critical provisions:
Binding Provisions:
- Exclusivity
- Confidentiality
- Buyer’s due diligence access
- Earnest money deposit (if applicable)
- Expense allocation
Non-Binding Provisions:
- Purchase price and payment terms
- Asset and liability allocations
- Structure of the transaction (asset sale vs. stock sale)
- Seller’s ongoing role and compensation
While courts generally uphold the non-binding nature of LOIs, they may enforce certain obligations if parties demonstrate intent to be bound or if negotiations occur in bad faith.
Key Elements of an LOI
1. Identification of Parties
The LOI should begin by clearly identifying the parties involved in the transaction. This includes the full legal names of the buyer and seller, along with relevant company details such as registration numbers, addresses, and contact information. Clarity at this stage prevents any misunderstandings regarding the entities involved in the deal.
2. Description of the Transaction
The LOI must specify the nature of the transaction. In the case of an iGaming business, this could involve the sale of an entire online casino platform, an affiliate website, software, or other digital assets. The description should also clarify whether the transaction is an asset purchase (where specific assets are transferred) or a share purchase (where ownership of the entire company is transferred).
3. Purchase Price and Payment Structure
One of the most critical sections of an LOI is the purchase price and how it will be paid. The document should outline:
- The total purchase price or valuation of the business.
- Payment terms, such as lump sum payments, installment payments, or earn-outs based on future performance.
- Whether the payment will be made in cash, stock, cryptocurrency, or a combination.
- Any conditions that might impact the final purchase price, such as performance benchmarks or post-closing adjustments.
4. Due Diligence Process
Due diligence is an essential part of any M&A deal, allowing the buyer to thoroughly investigate the business before finalizing the transaction. The LOI should specify:
- The scope of due diligence, including financial, legal, technical, and operational aspects.
- The timeline for completing due diligence.
- The type of information the seller is required to provide, such as financial statements, traffic data (for online businesses), customer databases, and regulatory compliance records.
- Any access the buyer will have to company employees, key stakeholders, and third-party vendors.
5. Confidentiality and Exclusivity
To protect sensitive business information, LOIs often include confidentiality clauses that prevent either party from disclosing details about the negotiations or the business under discussion. Additionally, an exclusivity clause (also known as a “no-shop” clause) may be included, prohibiting the seller from negotiating with other potential buyers for a specified period.
6. Closing Conditions
Closing conditions outline the prerequisites that must be met before the transaction is completed. These may include:
- Regulatory approvals (e.g., gambling licenses for iGaming businesses).
- Completion of due diligence to the satisfaction of the buyer.
- Absence of material adverse changes in the business.
- Agreement on employment contracts or retention of key personnel.
7. Transition and Post-Closing Commitments
To ensure business continuity, the LOI should outline any post-closing commitments. This may include:
- Seller’s transition assistance, such as training or operational support for a specified period.
- Non-compete and non-solicitation agreements to prevent the seller from directly competing with the buyer or poaching employees after the sale.
- Employee retention strategies and whether key personnel will remain with the business under new ownership.
8. Binding vs. Non-Binding Provisions
Most LOIs are non-binding, meaning they serve as a framework rather than a legally enforceable contract. However, certain provisions may be binding, such as:
- Confidentiality clauses.
- Exclusivity agreements.
- Expense allocations (who pays for legal and due diligence costs).
- Governing law and jurisdiction in case of disputes.
9. Timeline and Next Steps
Finally, the LOI should provide a timeline for moving forward with the deal, including key deadlines for signing definitive agreements, completing due diligence, and closing the transaction. This ensures that both parties remain aligned and committed to progressing toward the final deal.
Conclusion
A well-structured LOI is essential in any M&A transaction, particularly in the iGaming industry, where regulatory and operational complexities can impact deals. By clearly defining key terms, expectations, and conditions, an LOI helps prevent misunderstandings and sets the stage for a successful acquisition. While not legally binding in most cases, an LOI provides both buyers and sellers with confidence and a clear roadmap for negotiations, ultimately facilitating a smoother transaction process.