What Does Letter of Intent (LOI) Mean?
A letter of intent (LOI) is the term sheet that a buyer puts forward to a potential target stipulating the purchase price, terms and conditions governing the offer. The purchase price or enterprise value is often presented first. However, a LOI also must specify the transaction structure, including what percentage of the purchase price is being offered in cash and non-cash consideration, such as equity in the buyer, vendor take back financing and earnouts, etc.
In addition to the purchase price, a well structured LOI clearly stipulates the following terms:
- The amount of non-cash working capital that is expected to support the enterprise value;
- The fair market value of any capital assets that support the deal;
- The value of the equity in the buyer that the seller retains;
- The interest rate and terms of any vendor take back financing being offered to the seller; and
- The buyer's expectations from the sellers regarding go forward employment.
- The ability for the buyer to secure adequate financing for the transaction;
- The satisfactory completion of due diligence on the seller; and
- Any disclosures or representations from the seller that are built into the buyer's financial modelling of the target company post transaction.
Lastly, a LOI stipulates all key dates, including when due diligence is to commence and finish, completion of financing, completion of major agreements and, finally, the closing date.