The Lowly Letter of Intent

Big Red Car here in the ATX — 43F, light rain, ceiling at 300′ and no wind. Will be 64F before the day is over. Saturday will be high 70’s. No mention of snow.

So The Boss is talking to one of his brilliant CEOs and they were trying to figure out how the CEO would make an important change in the capital structure and ownership of his company. It had been bugging the CEO for months. Months. Finally, he brought it to The Boss and they chatted about it.

The Boss said: “Letter of intent.”

The CEO, who was brilliant about all things product but who was not terribly experienced in running companies and had never made such a dramatic change in his business before, said: “Huh?”

A letter of intent, as it seems to indicate, is the vehicle whereby a CEO can announce his intentions to the recipient. It is a good first step after introducing the subject. Most such negotiations are 5-7 step processes and the letter of intent is “touch” number two. In each of the steps, you will be jumping halfway to the lettuce.

In this specific instance, it would entail cleaning up the cap table and acquiring the interest of an investor whose interest in the business had changed but who owned such a substantial chunk of equity that the company could not effectively raise money. The magnitude of the equity was blocking the new money and would so dramatically dilute the other founders as to make it uninspiring to continue. Typical problem.

The letter of intent itself is just an exercise in who, what, when, where, why, how much. Here is a simple exemplar The Boss often gives to CEOs looking for a starting point.

Sample Term Sheet company sale

In this instance, it was originally created for a proposed sale of a company which did, in fact, materialize. It’s been used for plenty that didn’t make it also.

Some practical thoughts on letters of intent.

1. Striking first — defining the terms of the discussion with a letter of intent — seems to lead to better outcomes. Like checking the inflation of the footballs before a game [cheap shot alert].

2. Remember always it is a negotiating technique. You don’t get what you deserve, you get what you negotiate. Negotiate.

3. The letter of intent provides great input to the lawyers to paper up the final deal with the caveat that the signatories to the letter of intent are the “business decision” deciders, not the lawyers. If the lawyers get wrapped in their scrivener underwear insist they come back to the business folk to make the business decisions.

4. Good letters of intent always result in lower legal fees.

5. Develop a good library of letters of intent for different purposes.

Letters of intent are called all kinds of things — term sheets, memoranda of understanding. In the end, they’re all letters of intent.

If you get stuck on something, call The Boss at 512-656-1383 or email [email protected]

But, hey, what the Hell do I really know anyway? I’m just a Big Red Car. Be kind to yourself. You deserve it. You’ve got a tough job at a tough time in the history of the world.

9 thoughts on “The Lowly Letter of Intent

  1. Somewhat timely discussion…I was on a conference call this morning with a client CEO (and others) discussing an Investment Banking agreement he is evaluating for the sale of his company. We did not get into the whole sale process, but the LOI in my opinion is an essential aspect of the negotiation between the buyer and seller. I have read, reviewed and help draft many of them. I tend to favor ones with more specifics than generalities. If the LOI is too general, the ‘terms’ that end up in the Purchase Agreement may be far different than what was expected. In one situation, the strategic buyer we were dealing with was such a pain, the LOI we settled on was essentially the outline of the purchase agreement (and this did expedite the overall legal process).

    • .
      As a savvy business pro your comments are more than simple validation.

      The LOI has to conform to the personalities of the parties involved — and their character.

      Good LOIs start general and become specific. Crawl, walk, run.

      The engagement created by batting the LOI back and forth is both a few touches of the 5-7 touch process but it is also “skin in the game” and creates a more virulent commitment.

      Well played.


  2. interesting. when I was on the board of CME we used to enter into Mutual Letters of Understanding with other exchanges all the time. That was in the days pre mergers, and pre demutualizaton when every exchange was parrying for strategic position. I found them not worth the paper they were printed on. Your factset is far different; would be interesting to see if actually negotiating and writing a non-binding legal doc prior to getting it to the attorneys would be worth the time and effort of doing. Certainly, you are going to have discussions, emails etc prior so maybe it’s worth it.

    • .
      Having done it hundreds of times, I can tell you unequivocally it works and saves money in legal fees.

      It is also a great way to smoke out the real issues in a potentially difficult negotiation. If it isn’t in the letter of intent, it is not likely important to the other party.

      Any agreement is only as good as the character of the people involved.

      A letter of intent — a prelude to a final agreement typically — is subtly different than a memorandum of understanding which is typically more of an operating agreement.


      • You helped me think this morning. When I look back on agreements that went bad it was because I didn’t understand the critical issues well enough. The critical issues remained hidden.

        I like this approach for two reasons.

        1. It puts issues on the table where they are visible to everyone
        2. It established credibility of character

        Thanks for the lesson. If I only read this a few years ago….

        • .
          Sometimes in business, we start with the complex because business has become progressively more complex.

          The art of making a deal really hasn’t changed much. It’s still who, what, when, where, why, how much — and the character of the person on the other side of the table.

          Not only is a good letter of intent simple, it projects a sense of competence while defining the playing field upon which the negotiations were going to take place.

          It also saves a lot of time. I cannot tell you the number of times that a good LOI had told me — “not going to happen”.

          Do not despair. Those earlier years are just tuition, Kevin.


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