An LOI Is Not a Done Deal

184792973Signing a Letter of Intent (LOI) is an important milestone on any staffing M&A transaction.  I like to think of an LOI much like a wedding engagement, as it’s a non-binding agreement to work toward a formal, binding arrangement in the near future.  And much like a wedding engagement and preparing for the upcoming nuptials, there’s a great deal of work that must be completed to make that big event a reality.

First, let’s summarize what is in a letter of intent. The letter of intent lays out the basic framework for the anticipated transaction. Most LOIs will typically summarize the purchase price of the planned transaction, the form of consideration to be used by the buyer (cash, stock, seller notes, etc.), whether it’s an asset deal or stock deal, what assets and liabilities are being acquired, the earnout parameters (if any), how the working capital of the seller will be handled, the anticipated timing to close the transaction, details around exclusivity for the buyer and finally, language on maintaining the confidentiality of the transaction discussions.  Except for the exclusivity and confidentiality language, an LOI is generally non-binding, so neither the buyer nor seller is under any formal obligation to complete the transaction.

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Once the LOI is executed, the typical next step for most buyers is to conduct confirmatory due diligence on the seller’s business to determine whether everything the seller has represented in the discussions to date are accurate. The buyer will provide the seller with exhaustive due diligence request lists that cover a variety of areas, including financial, accounting, operations and legal due diligence. The buyer may also hire an outside firm to conduct a “Quality of Earnings” report to verify the accuracy of seller’s information.  Onsite visits from the buyer’s accounting firm, the buyer’s operations team, or both are often necessary to facilitate the diligence progress.  If the seller’s financial information is validated, the deal may go forward without any changes.  If issues are uncovered, such as when the annual EBITDA of the seller is lower than expected, this is when most buyers may attempt to renegotiate the transaction parameters given this new information.

Documenting the details of the transaction in the form of an Asset Purchase Agreement or Stock Purchase Agreement is another arduous step in the process. For most staffing transactions, the buyer’s counsel will prepare the first draft of the purchase agreement. The seller’s legal counsel will review the agreement and submit back to the buyer a detailed markup and comments. Comments will continue to be exchanged until all of the legal issues are resolved, with this process typically occurring over a several week period. Disclosure schedules will also have to be completed, with the seller inserting the details into these schedules and the buyer reviewing and commenting.

Other important aspects that must be addressed before the closing include employee related issues. Will the buyer require any of the seller’s staff to execute new employment agreements and if so, terms will need to be negotiated. Are all of the seller’s employees being offered employment post-transaction?  What is the communications plan and timing for informing staff employees, temporary workers and customers of the transaction?

Furthermore, sellers usually insist that buyers hold off on their final customer diligence until just before the closing, so developing a game plan for these sensitive customer conversations is vital.  On some staffing transactions, the buyer may demand that certain customer contracts be formally assigned to the buyer as a closing requirement, which may necessitate a two-step sign and close process.  Are landlord consents required to close?  Are there any bank payoff letters that must be obtained so that all outside creditors are paid off at closing?  All of these details must be attended to before the transaction can officially be completed.

M&A transactions can easily get sidetracked between the execution of the LOI and closing, so knowing exactly what needs to get done, by who and when is critical to successfully completing your transaction.  Most sellers find it necessary to enlist the help of key internal personnel, as well as experienced legal, accounting and M&A advisors to help them through the process. So while you should acknowledge the important milestone of executing an LOI, your deal is not done until both the purchase agreement is signed and the cash is safely wired to your account. Only then can the real celebration begin!

John Niehaus

John Niehaus
John Niehaus is a managing director with Duff & Phelps Securities LLC. He has been actively involved in the management of staffing-related M&A transactions for more than 20 years. He can be reached at john.niehaus (at) duffandphelps (dot) com.

John Niehaus

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