Purchasing or selling an online business is a multi-step process. For potential buyers, finding the right profile of an acquisition target can be an arduous journey. For sellers, getting in front of interested and qualified buyers can mean navigating a maze of obstacles. In this article, we outline the next step in the process. Once a prospective buyer finds a company it is interested in, there will probably be some communication and preliminary due diligence. After that and to let the seller know that a potential buyer is serious, the potential buyer will send the seller a Letter of Intent (“LOI”). The LOI is the first formal and legal communication between the potential buyer and the seller and sets out the main terms of the eventual transaction. Most of the terms of an LOI are not binding and are subject to further negotiation, but a few of the provisions (exclusivity and confidentiality) are binding obligations and sellers should take note.
Assets
The LOI will identify the assets the prospective buyer is offering to purchase. Most commonly, this will be standard language to encompass all of the seller’s assets. If the seller is a conglomerate or is only selling some of its assets, though, there will be modifications to this section. If the seller is not planning to sell all of its assets, then the seller needs to make this clear from the outset of negotiations to avoid any confusion a prospective buyer might have later in the process.
Payment Terms
Next will come the purchase price, payment schedule, and description of what the purchase price will be paid in. These terms are subject to any number of permutations—payment can be all in cash (dollars, euros, pounds, etc.) at the time of closing, there can be payment in stock over a period of several years, or some other arrangement. These terms are of critical importance to both buyer and seller, and both sides should expect that substantial negotiation will take place around these terms.
Conditions to Closing
This is mainly boilerplate language. It is standard to say things like the potential buyer must be satisfied with the due diligence process, that the buyer must secure financing to make the purchase, and that the parties need to agree on the definitive deal documents for the transaction to close. There can also be some outlandish conditions to closing, though, so be aware.
Due Diligence
The LOI will contain an outline of the schedule of the prospective buyer’s due diligence. More important for the seller, though, is that this section will also describe the level of access to customers, facilities, records, employees, advisors, etc. that the prospective buyer will have in order to carry out the due diligence process. It is important the seller place certain limits on the prospective buyer’s access so that operations of the business are not interrupted too much while the due diligence process is ongoing.
Exclusivity
By signing the LOI, the seller commits to stop communicating with other potential buyers for a period of time. This period of time allows the prospective buyer to conduct due diligence under the knowledge that it will not expend time and effort during due diligence only for another buyer to come in at the last minute and hijack the deal. Sellers want this period of time to be shorter and buyers want this period of time to be longer, so expect some negotiation on that point. There can also be clauses to allow for the extension or the early termination of the exclusivity period in certain circumstances.
This is one of the few provisions of an LOI that is binding and so could be enforced through an injunction from a court, so prospective sellers should take this term seriously.
In exchange for exclusivity, sometimes sellers will require prospective buyers to pay an earnest-money deposit. People may be more familiar with such a deposit in real estate transactions, but the mechanics are similar for SaaS or E-Commerce transactions. The deposit is non-refundable (subject to certain exceptions that can be negotiated) and will be credited towards the total purchase price. The reason a seller may want to require an earnest-money deposit is that the seller is unable to have discussions with other potential buyers during the exclusivity period. If the deal doesn’t close, the seller will have lost the time spent under lockup and will have missed other potential buyers. Given that reality, it is reasonable for the seller to have some protection against prospective buyers who back out of a deal.
Confidentiality
There may already be a non-disclosure agreement (“NDA”) in place before a prospective buyer sends an LOI to a seller. If there is, then the LOI will reference the existing NDA and make clear that the LOI is covered by that earlier NDA. If there was not an NDA signed before, then the LOI should state that its terms are confidential to the prospective buyer and seller. The prospective buyer wants this confidentiality in place so that the seller doesn’t broadcast the potential buyer’s identity to the world in case the deal collapses. From the seller’s perspective, there needs to be an NDA signed as soon as possible if there wasn’t already an NDA in place as the seller should not allow any due diligence without a signed NDA in place. The confidentiality term will also be a binding obligation on the seller enforceable by a court just like the NDA.
Legal Niceties
You should expect to see several other terms in an LOI. These will be things like choice-of-law provisions and forum selection clauses. These will almost always be set by the prospective buyer and are not likely to be negotiated. Sellers should still review these provisions to make sure there is nothing amiss, but the seller’s energy should be spent on other topics since the likelihood of any of these terms becoming important is small.