Start with an LOI or Term Sheet

While it seems easy and most expedient to make a verbal or bullet point offer it is actually the least effective method of reaching agreement between two parties. The reason it seems most expedient, is because theoretically if the parties can agree on the big deal points it should be relatively easy to reach consensus on the more minor deal terms and to get the finer language points hammered out. In reality, this is not the case. Oftentimes, the finer details have a significant impact on whether or not the larger deal terms will make sense.

We recently had a buyer insist on using a bullet point offer, leaving out many of the details necessary for a successful acquisition. We advised our client to either request the buyer provide a more formal letter of intent or term sheet or to respond with our own comprehensive offer. Unfortunately, the parties elected to ignore our advice and proceeded with a mere outline. One week later the parties appeared to reach agreement on the outline and we once again encouraged the parties to memorialize this in a formal letter of intent.

At that point, the parties did agree to draft a more comprehensive offer to cover all the details. However, it will come as no surprise that discussions broke down at this point because there was major disagreement on some of the minor points that could easily affect value. For example, there was disagreement around the handling of work in progress, indemnifications and prepaid expenses on the balance sheet. It is easy to omit many of these items when you simply focus on purchase price and the payment terms of that price in a verbal or bullet point offer.

The effect of the multiple and ongoing negotiations is that both parties become fatigued and start to distrust one another. It’s a natural human reaction because you may feel that the other side is trying to take advantage after your ‘seemingly’ reached agreement on the larger terms. Our best advice is to bite the proverbial bullet upfront and negotiate a comprehensive LOI or Term Sheet. This ensures all the difficult discussions occur at one time, all the terms are contemplated and, if there is a deal, you can quickly move on to the hard work ahead of due diligence, lending, definitive agreement negotiations and all the other challenges of closing a transaction.

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