Matt Holtz | Senior Director – Corporate Development
A letter of intent (LOI) is a document that outlines a preliminary agreement between two or more parties. It’s a measure of alignment before a formal, legally binding agreement is finalized. In business, the letter of intent is a major step toward buying or selling a business.
During the LOI stage, there can be a lot of back-and-forth negotiation as each side begins to size up the potential deal. And truthfully, it’s the stage where most of the finer details of the deal are negotiated. Once an LOI is signed, leverage is significantly reduced.
Here’s a look at qualitative aspects to consider when reviewing a letter of intent.
1. Strategic Fit and Vision
First and foremost, assess whether the acquiring company shares a similar strategic vision for the future of the business. If the acquisition aligns with your long-term goals and objectives, the deal may be worth considering.
For example, when Disney acquired Pixar Studios, the two companies had complementary goals. Pixar was well-known for its animation technology and creative storytelling while Disney had an established reputation with a strong brand presence and extensive distribution channels. The acquisition would add power and momentum to the Pixar brand.
2. Cultural Fit & Employee Well-Being
Next, assess whether the potential buyer aligns with the culture and values of your business. Strategic growth initiatives can – and often are – undercut by a mismatch in organizational cultures between the two entities.
When Sprint acquired Nextel, they hoped to expand market share while accessing Nextel’s unique push-to-talk technology. Unfortunately, the intended growth never materialized. Sprint’s culture was formal and corporate with a focus on traditional mobile and broadband services while Nextel felt more like a startup.
Nextel had an entrepreneurial spirit with a strong focus on innovation and customer service. Almost immediately, priorities and management styles clashed which ultimately became a point of failure.
3. Reputation and Brand Management
Patagonia’s founder, Yvon Chouinard, has consistently turned down offers to sell Patagonia despite the potential for significant personal financial gain. Yvon believes that maintaining control over the company is crucial for preserving its core values. He has stated that selling the company would risk compromising its commitment to environmental and social causes, as well as its reputation for producing a high-quality, ethically sourced product.
When pressed further on why he would hold on to a company that is valued at over $3 Billion, Yvon stated that a new owner might prioritize short-term profits over long-term sustainability goals, leading to compromises in product quality, environmental stewardship, or labor practices. He believes that keeping these practices in place not only aligns with the company’s values but also resonates with its target customers, ultimately curating a loyal customer base.
Yvon Chouinard and Patagonia’s decision to prioritize brand integrity over financial gain reflects its long-term vision for sustainable growth and its dedication to making a positive impact on the world. While the company may forego the opportunity for a lucrative sale, it gains invaluable credibility and trust among consumers.
4. Future Growth & Innovation
Even if you are exiting with the sale of the business, think about the long-term prospects for the company. Is the buyer capable and/or willing to invest in the future growth of the business? This is one area in which you want to look for synergies that can drive innovation post-acquisition.
For example, the social media platform Instagram had around 1 million users, almost exclusively limited to iOS devices prior to being acquired by Facebook. Today, that same platform has more than 1 billion users because a proven social media giant with strong capabilities to develop technology was on the other side of that deal.
Do you think we would even remember the name Instagram if the acquiring company had been less capable?
5. Transition & Integration
Finally, assess how the acquisition will impact the existing management team and leadership structure. A smooth transition is essential for maintaining operational efficiency and employee morale.
What does the integration process look like? Is there a well-planned strategy? Is there forethought in regard to the impact on employees, customers, and other stakeholders? What happens to the legacy that you have built if the acquiring company fails to successfully integrate your company into theirs?
It’s important to research potential buyers in detail to understand their track record and how it aligns with your goals for the next phase of the business.
Final Thoughts on LOI Considerations
The letter of intent may not be legally binding, but it is no less important. Take your time in reviewing and redlining the LOI to ensure that the proposed deal is a deal that you want to pursue. Once an LOI is signed, the seller often loses significant negotiating power. Now is the time to be detailed and clear about everything from fit to reputation management, all the way to post-acquisition integration.
If you need help sorting out the nuts and bolts of a letter of intent, reach out to Embarc Advisors. We can help you understand and negotiate key terms in your LOI and term sheet before you lose leverage.
