I’m frequently asked about the “right” price to put in the letter of intent. As you will know, the LOI is an important milestone in the M&A process, because it establishes a “gentleman’s agreement” before the formal deal is settled. You have yet to compete due diligence at this stage, and figuring out the right price before you have all the information can be difficult. Do you go in with a high number so the seller signs the LOI? Or do you use a more modest number and risk losing their interest?
Think Before You Price
The number you present in your LOI should be a reflection of how you want your transaction to play out. Be aware of the unintended consequences of using too high or too low a figure. Each transaction is different, and buyers and sellers have different priorities, so no one number is right for every scenario.
Notice I did not say the price in the LOI should be the amount you are willing to pay or “an honest value.” I shy away from these types of statements because they imply that both buyer and seller are on the same team. While you don’t need to be combative, your role is to strike a deal that is to your benefit, and that means negotiating effectively.
Sometimes people use a very high number in the LOI to get the seller to sign it. Then during negotiations and formal due diligence they try to identify risks so they can reduce the purchase price. This strategy sometimes works. For example, when negotiating with a publicly held company it may be advantageous to have them sign the LOI sooner rather than later to keep momentum in a deal.
However, in other situations, especially with privately held businesses or first-time sellers, the owner may feel like you have “stolen” from them or misrepresented the transaction on the LOI. They may become frustrated and decide not to sell. Or if they do sell to you, and you intend to keep the former owner on as part of your management team, you will have a very sour relationship moving forward.
Keeping the Big Picture in Mind
When writing a price in the LOI, consider the big picture and your desired relationship with the owner. Remember, acquisition price is just one piece of that picture and there are many other nonfinancial issues that you will be discussing with the owner to come to the right deal.