Action Items to Consider Before Entering into a Letter of Intent (LOI)

As M&A activity in the roofing industry remains strong, many sellers elect to enter into a term sheet and/or Letter of Intent (LOI) with potential buyers before consulting with advisors. While sellers may be eager to close deals quickly, it is imperative that sellers not overlook or minimize the important steps that should be taken before signing an LOI in order to avoid potential complications later.

What is an LOI?

An LOI is a document outlining the parties’ intent to engage in a purchase and sale transaction. It is generally drafted by the buyer and establishes the basic terms of the deal. While the business terms outlined in an LOI are generally deemed to be non-binding until the parties have finalized the definitive purchase agreement, attempting to deviate from them later can be challenging unless there is a compelling reason, and could jeopardize the deal.

Determine Your Objectives: Before engaging with any buyer, clarify your objectives and consult with your team of M&A advisors, including your legal, accounting, and investment professionals. Key considerations include:

Whether you want to fully exit the business or stay on post-closing.
Whether you are open to reinvesting some of your sale proceeds into the buyer’s company, which is common with private equity buyers.
Whether continuity for your management team and employees is important, as this may influence the type of buyer (private equity, strategic acquirer, etc.) you should target.

Understand Your Financials and Valuation: To set realistic expectations on the value of your company, work closely with your accounting team to review and, as necessary, clean up your financial statements. A buyer will conduct a detailed financial review, often called a “Quality of Earnings” review (Q of E), to justify their offer. Make sure that your accounting team is familiar with the Q of E process and consider having them conduct a limited pre-sale Q of E on your behalf to:

Help provide you with a clear picture of your company’s value as viewed by a potential buyer.
Address any financial discrepancies.
Prepare to defend your valuation during negotiations.

Engage Legal Advisors to Review the LOI: Have your legal team review the LOI before signing to make sure your deal terms are as you intend. They can help ensure that key deal terms have been addressed that are both favorable to you and anticipate any potential risks. The LOI should also address:

Tax-efficient deal structures you might seek.
Rollover equity requirements, if applicable.
Employment or consulting terms if you are staying on post-closing.
Restrictive covenants and other relevant provisions.

Also consider addressing any pending disputes, regulatory concerns, or other legal matters before the buyer begins its due diligence review. Resolving these issues early can help present your company more positively and facilitate a smoother transaction.

Conclusion

Entering into an LOI is a significant step in the M&A process often not entirely understood by sellers, and it is critical to prepare in advance. Engaging advisors early and carefully preparing for the LOI process can help you understand the implications of the transaction and set your company up for a successful deal.