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GK Quarterly | March 2020

March 02, 2020

GK QuarterlyThe more things change, the more...

Combining the tailwinds of readily available capital and a deep bench of privately-held sellers looking to exit businesses with the uncertain impacts of coronavirus (COVID-19), the upcoming U.S. elections and other macro trends, we expect middle market deal flow to continue at a relatively robust pace in 2020.

If this trajectory holds, 2020 would continue the longest cycle of uninterrupted M&A activity in our firm’s 60+ year history (as we write this, a “knocking on wood” sound can be heard through our offices...). Comparing the current cycle to its predecessors, certain constants emerge. Among these are the seemingly humble letters of intent—one of the most useful, and too frequently neglected, tools in the dealmaker’s toolkit.

Letters of intent, term sheets and memoranda of understanding (LOIs) are preliminary documents entered into during the early stages of a transaction, outlining the economic terms for the deal and any non-economic terms that the parties feel warrant a (non-binding) meeting of the minds early on. LOIs are typically executed prior to the parties undertaking the bulk of their due diligence efforts (at a minimum, the buyer has probably reviewed high-level financial information as a basis to formulate its offer) or exchanging drafts of definitive transaction documents, each of which quickly drives up transaction costs.

The deal lawyer’s view of LOIs

LOIs benefit the deal by:

  1. Solidifying the buyer’s valuation
  2. Helping determine what is paid, when, by whom, and how
  3. Anticipating multi-party negotiations
  4. Negotiating confidentiality
  5. Determining exclusivity periods
  6. Indentifying who are we dealing with

(Thoughtful) LOIs save time and $$$

If used properly, LOIs are an effective means to filter deals that close from those that drain time, money and other critical resources. In our experience, parties who skip the LOI stage, or rush through and fail to give it the necessary attention, do so at their own peril.

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