Appendix: Example Letter of Intent (LOI)
This is an example of a Letter of Intent. Each LOI is very different, but this should give you a sense for the type of language that’s used.
Overview
In this Transaction, the Seller will sell all of its assets to the Purchaser, except for cash, bank accounts, and any excluded assets that they both agreed upon. The Purchaser will only take responsibility for non-past due accounts payable included in the working capital adjustment and obligations for future performance under all assumed contracts, leases, and licenses (known as “Assumed Liabilities”). All other liabilities, such as indebtedness, tax liabilities, capital leases, change of control payments, severance payments, obligations to equity holders and benefit plans, transaction expenses, and any other liabilities, will be excluded and discharged by the Seller and its equity holders, and referred to as the “Excluded Liabilities.”
Purchase Price
The Enterprise Value (EV) of the business, assessed on a cash-free debt-free basis, is $VALUATION, as evaluated by the Purchaser. To acquire the Purchased Assets, the Purchaser will pay the Purchase Consideration, which is calculated by adding the Enterprise Value to (i) any remaining cash and cash equivalents on the balance sheet at the Closing, if there are any, and (ii) the difference between the closing working capital and the negotiated target working capital, if greater or less.
The Purchase Consideration is divided into three parts: (a) $AMOUNT million in cash to be paid at the Closing, known as the Closing EV, (b) $AMOUNT million contingent on the financial performance during the Earn-Out Period, which lasts for 12 months until DATE, known as the Earn-Out, and (c) $AMOUNT million reserved for a management pool for non-member employees. The management pool will be paid out in full at the end of DATE, subject to continued employment. However, if an employee does not stay employed until DATE, their allocated portion of the management pool will be forfeited and not redistributed to anyone else. The specific allocation of the management pool will be determined and specified at the Closing.
Earnout
The Earn-Out will be earned as follows:
$AMOUNT will be earned at FIRST CALENDAR YEAR DATE if the Earn-Out EBITDA (defined below) for the calendar year ending DATE reaches $AMOUNT million or more. If the Earn-Out EBITDA is less than $AMOUNT million, the DATE Earn-Out will be zero.
$AMOUNT will be earned at SECOND CALENDAR YEAR DATE if the Earn-Out EBITDA (defined below) for the calendar year ending DATE reaches $AMOUNT million or more. If the Earn-Out EBITDA is less than $AMOUNT million, the DATE Earn-Out will be zero.
The calculation of “Earn-Out EBITDA” will be based on the net income of the Seller business unit, determined in accordance with generally accepted accounting principles that are consistently applied. This will be calculated by restoring amounts deducted for interest on borrowed money, taxes on income, depreciation and amortization, and by deducting all extraordinary items of income, interest and investment income, and gains on any sale or similar transaction that is not in the ordinary course of business. Purchaser will provide monthly financial reports for the Seller business unit, including revenue, operating income, net income, and EBITDA. The definitive documents will have standard review, payment, dispute resolution provisions, and a senior debt subordination agreement. Any Earn-Out that is due will be paid to the Sellers no later than 30 days after the end of the review period following the completion of a final independent auditor’s report on the consolidated financial statements for DATE.
Working Capital
The Definitive Agreements will incorporate a working capital adjustment to the Enterprise Value, which will be estimated at Closing and reconciled post-closing. This adjustment will be based on the positive or negative difference between the target working capital and the closing working capital. The determination of the closing working capital will be in accordance with GAAP and Seller’s historical accounting practices that were used in the preparation of the latest financial statements, without considering any purchase accounting resulting from the Transaction, as long as they are consistent with GAAP.
Escrow
Upon the Closing, the Purchaser shall deposit an amount of $AMOUNT in cash into an escrow account, known as the “Escrow Amount,” which will be held for 12 months after the Closing, referred to as the “Escrow Term.” The release of the Escrow Amount will be subject to the provisions of the Escrow Agreement. During the Escrow Term, any indemnification obligations of the Sellers shall be satisfied initially by reducing the principal amount of the escrow.
Fees
The Seller is responsible for paying any brokerage fees and commissions. The Purchaser will bear all its expenses, such as legal, accounting, consulting, financing, and other fees and out-of-pocket expenses. Unless otherwise stated, no fees related to the transaction or post-closing will be charged.
Conditions to the Purchaser Obligations to Close
The completion of the transaction by the Purchaser and Seller will only be subject to the following conditions precedent:
(a) Sellers performing the covenants in the Purchase Agreement;
(b) Sellers’ representations and warranties being true in all material respects on the closing date;
(c) No court or regulatory order preventing the parties from completing the transaction;
(d) Obtaining consents to change of control for material contracts containing change of control clauses;
(e) No material adverse change affecting the Company, except for any changes that are not specific to the Company; and
(f) Sellers and Purchaser satisfying all closing delivery requirements under the purchase agreement.
The purchase agreement will not include any financing or due diligence conditions.
Representations
As part of the Definitive Agreements, Seller and each of the Sellers will provide customary representations and warranties for a transaction of this nature. These representations and warranties will remain in effect for 12 months following the Closing, except for the Fundamental Reps, which will survive indefinitely after the Closing. Fundamental Reps include representations and warranties related to due authorization, no-conflict, validity and enforceability, capitalization, affiliate transactions, title to assets, and brokers. Tax matters will survive until 90 days after the expiration of all applicable statutes of limitations (including all extensions thereof) related to the underlying subject matter being represented.
Indemnities
Sellers shall indemnify Purchaser, based on the terms and conditions outlined below, for (a) any violation of representations and warranties described in the Definitive Agreements, (b) any violation of covenants provided in the Definitive Agreements, (c) any Excluded Liabilities, (d) any pre-closing tax obligations, and (e) claims arising from fraudulent representation in the Definitive Agreement. Such indemnification will be on a several basis, pro rata share, and not joint and several among the Sellers.
Liability
For all representations, warranties, indemnities, and other obligations provided by the Sellers regarding the Company, each Seller will be separately liable (and not jointly and severally liable). For all representations, warranties, indemnities, and other obligations provided by a Seller regarding themselves, each Seller will be separately liable (and not jointly and severally liable).
