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January 23, 2024
By Nicholas P. Flint

Recently FCW’s M&A group negotiated and closed two sell-side transactions of equal size, but with drastically different outcomes in the way of deal terms. The difference? Simply put: one client engaged our counsel throughout the Letter of Intent (LOI) negotiation; the other did not.

Many companies wait until their LOI is signed to engage M&A counsel, but doing so has risks and almost always results in a worse deal for that company. Although LOIs are generally non-binding, they set the stage for future negotiations and provide a baseline to work from. It is one thing for the parties to negotiate a detail or nuance that the LOI didn’t address; it’s quite another to re-negotiate a term that was directly on point and agreed upon at the LOI stage.

The consequence of not having M&A counsel negotiate the LOI is that seemingly innocuous (but unfavorable) terms can be agreed to by one party, then heavily relied upon down the road by the other party when negotiating the definitive purchase agreement. In the above example, a client FCW has represented for decades involved our M&A team throughout the entire process, from initial LOI draft to closing the deal.  In that LOI, specific terms such as target working capital, indemnity survival and limitations, and even fundamental representations were all agreed upon up front. When it came time to negotiate the purchase agreement, most of the “heavy lifting” on legal terms was done, and the parties cruised to a successful closing.

On the other hand, our firm was engaged post-LOI by a seller who had signed the first version of the LOI presented by the buyer with little to no negotiation. Significant terms, which seemed harmless at the time—such as an indemnity holdback being held by the buyer rather than a third-party escrow agent—became the baseline that our M&A team had to negotiate from. The end result was a significantly worse deal for our client, putting hundreds of thousands of dollars at risk, where our services to negotiate that same LOI would have been a small fraction of the funds now in jeopardy.

By failing to engage competent M&A counsel to negotiate an LOI, whether due to cost or not knowing otherwise, businesses unknowingly hamstring their counsel and almost always end up with a worse transaction. Experienced M&A attorneys handle hundreds of transactions throughout our careers, and it is our job to protect our clients’ interest while negotiating a fair and successful deal. To do so, we must be involved early and often.

Nicholas Flint is an attorney with Flint, Connolly & Walker, LLP who represents domestic and international clients on a variety of corporate and transactional matters, including mergers and acquisitions, joint ventures, private equity and venture capital transactions, financing and lending arrangements, and debt and equity offerings. In addition, Mr. Flint serves as a general business and legal advisor to his clients, counseling on matters such as corporate governance, executive compensation, regulatory compliance, and commercial contracts.