Today's tip on creating a winning LOI comes from years representing top private equity groups and learning from some of the best M&A lawyers in the world.
This lesson discusses what a seller sees when reading between the lines of a letter of intent (LOI) and how to win deals at a better valuation. I have sat with sellers reviewing tens of LOIs and I have helped buyers craft LOIs that have won despite offering a lower price. These things work.
As a buyer, you have to get into the seller’s head, but not too overtly. Here are five subtle things that can be more compelling than price*.
Reasonableness & Pleasantness. When I read an LOI, I can tell within minutes if the buyer is reasonable and whether this transaction will be smooth. Sellers are scared of committing to a buyer that will make their life unpleasant for 90 days. Craft an LOI that shows you are intentionally leaving something on the table. This can be on indemnification, working capital, interest rate on a seller note, etc. Seller will see this.
Legacy. Sellers care deeply about their legacy and their employees' continuity. Almost every time I represent a seller they ask me about how to ensure their employees' well-being after closing. A buyer has to demonstrate they will be a good steward of the seller's legacy and care for their employees. This can be expressed in subtle ways by mentioning the employee plan or noting the continuity of sellers' values.
Values. Find a way to connect with Seller's values. This can be faith, family, or desire to control one's destiny. Don't make this overt, but find ways to hint at it. Seller should feel that they can comfortably get a beer with buyer.
Professionalism. When I review an LOI, I see whether buyer is seasoned and represented by professional M&A counsel. Non-professional buyers and those represented by poor M&A lawyers will decrease the chance that a deal closes. The best way to present a polished LOI that exudes professionalism is using an experienced M&A lawyer.
Likelihood of Closing/Financing. One of the worst cases for a seller is when they choose a buyer, and the buyer bails before closing because they failed to get financing. I often see sellers accept lower offers from more certain buyers. A buyer should outline financing sources, prior deals, and professionalism of their deal team.
Good buyers are able to communicate a lot in the tone of their LOI, what they say, and what they don't say. This will win deals with better value.
*Sometimes, price is most important, but usually, if price is close other factors will help a buyer win the deal.
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