In a buying or selling transaction, a formal agreement on the main aspects of the sale is usually required for both parties. In M&A, this is known as a binding offer or letter of intent. This offer formally guarantees you that the intention of your counterpart is the same as yours.
When someone is planning on buying a company, they need as much information as possible. The buyer will hire experts to make a complete review of the company by checking books and documentation before signing the contract. This will mean a significant expense for the buyer and the supply of information from the seller. Therefore, a formal agreement helps to avoid misunderstandings. This letter of intent states the commitment to begin negotiation of the pending aspects of the agreement that will end in a final sales agreement.
“ This letter of intent states the commitment to begin negotiation of the pending aspects of the agreement that will end in a final sales agreement.
The letter lays down the groundwork for the negotiation and establishes a baseline figure for the price. The points that need to be discussed in order to reach an agreement are highlighted, and time limits for completing negotiations are established.
The reason that this offer is binding is because both buyer and seller want to make sure that they are negotiating seriously, as one side is going to provide very sensitive information and give exclusivity, and the other side is going to invest resources in advisors. Additionally, the letter of intent is often required to get financing from the bank for the transaction.
When negotiating with a private equity firm, it is highly recommended to establish the letter of intent as binding and closed as possible. It is needed to take all the areas of the operation into consideration, in order to prevent any possible maneuvers of private equity firm after the due diligence is finished.
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The complex buying or selling process involves many little tricks, especially with regard to the financial and negotiating sides. Normally, on your first time leading an M&A transaction, you are inexperienced, which is quite a problem as the stakes are high. Due to this reason, we recommend that you surround yourself with well-prepared advisors. In this case, the experience is undoubtedly vital.