During an M&A transaction there are a number of documents that get exchanged between the buyers and the sellers that are key to the process. Expressions of Interest and Letters of Intent are two that sometimes get confused as to their meaning, how binding they are, and how and when they are used.
An Expression of Interest (known as an EOI) represents an indication to the seller of the serious interest on the part of the buyer. Its primary purpose is to show the seller the range of valuation that a buyer is willing to pay and show the advisory firm the serious intent of the buyer to pursue the opportunity through to a formal offer.
Advisors ask for EOI’s early in the process after buyers have made a preliminary review of the Confidential Information Memorandum (CIM) in order to help narrow the list of serious potential buyers and to move the engagement closer towards offers.
EOI’s are usually submitted in the form of a letter or a summary document, and in addition to the range of valuation, may include details on the proposed timing of the transaction, the synergies the buyer sees, the deal structure, and any other items that would help the seller to decide if this buyer represents a good fit and is worth pursuing further in the diligence process. EOI’s are non-binding. It should be noted that EOI’s are not required prior to submitting an offer and depending on the size of the transaction and how the advisory firm is managing it, EOI’s may not be a required part of the process.
A Letter of Intent (known as an LOI), is a more formal document that is provided by the buyer after an initial period of due diligence has been completed. LOI’s typically outline the primary points of the proposed offer, including the specific terms, deal structure (cash, stock, earn-out, vendor take-back, etc.) and the proposed timing. They signify the buyer’s desire to enter into an exclusive period to complete the transaction subject to additional due diligence and fulfillment of certain conditions. Letters of intent are helpful because they outline the principal terms of the deal early in the M&A process and are signed by all parties as a general agreement to key items such as the price and terms of a transaction. Letters of intent are typically precursors to the negotiation and signing of a final, “definitive agreement” containing all the terms of the transaction. Even though they are non-binding, it is recommended to have an M&A lawyer or attorney draft or review the LOI prior to submission to the seller.
As with Expressions of Interest, Letters of Intent are not a mandatory part of the M&A process and do not have to be provided in order to submit an offer. They are used as a guide for further negotiations that might lead to a final agreement and the closing of the transaction. Letters of Intent can help to move the process forward because they allow both parties to agree on the price and fundamental deal structure early in the process so that neither side wastes time pursuing an opportunity where the value and terms would be unacceptable to one side or the other.