Selling a company involves numerous agreements, many of which are often referred to by acronyms. Misunderstanding of these acronyms can lead to confusion when discussing important steps in the sales process. Key among these are the progressively more specific and binding documents executed to narrow down potential buyers and arrive at the ultimate terms of a sale. Here we take a moment to clarify some of the most important documents and their acronyms:
Non-Disclosure Agreement (NDA)
An agreement between the seller and a potential buyer that sets forth the terms under which confidential information of the seller will be provided to the buyer. After the execution of an NDA, the seller will provide confidential information to the buyer to aid the buyer in determining their level of interest and potential price to offer to acquire the business.
Indication of Interest (IOI)
Following signing of NDA’s and the sharing of confidential information, potential buyers will be asked to submit IOI’s if they want to move to the next phase of the process. In their IOI, buyers will be asked to provide detailed information about the acquiring entity, the range of consideration they expect to offer, the form of the transaction (equity or asset purchase), the source of their financing, any approvals required and the professionals they will be using. In a competitive sale with multiple buyers looking to acquire the business at the same time, the seller will select a small group of buyers to advance to the next step in the sale process, which may involve management presentations and access to a virtual data room.
Letter of Intent (LOI)
Once the seller and buyer have reached a basic agreement on terms, they will document that agreement in an LOI. The LOI usually includes the most significant basic terms, such as price. The LOI will typically not be binding on either party, other than one provision which allows the buyer to conduct exhaustive due diligence during a period in which the seller may not talk with any other buyer (the “exclusivity period,” typically 60 to 90 days).
Purchase Agreement (PA)
During the exclusivity period, assuming the buyer is satisfied with their due diligence findings, the seller and buyer will negotiate a PA. Depending on a number of complex factors, which we will address in future Deal Notes, the PA can takes one of many forms. Three of the most common are: (1) Stock Purchase Agreement (SPA) – for the sale of the equity of a corporation; (2) Membership Interest Purchase Agreement (MIPA) – for the sale of the equity of an LLC; or (3) Asset Purchase Agreement (APA) – for the sale of the assets of a company. In all these cases, the PA is the comprehensive, final document defining the terms and conditions of the sale. It contains the structure and mechanics of the transaction, specifies purchase consideration amount and form, lists Representations, Warranties and Covenants by both buyer and seller, states any conditions to closing, provides a termination provision and sets forth any break-up fees if the seller or buyer terminates the transaction. All these issues too will be addressed in future Deal Notes.
A great deal of confusion can be avoided during the sales process simply by understanding and using the appropriate terms when working with your professional advisors (accountants, bankers and lawyers). We hope this brief explanation helps clarify some of important M&A deal terminology.
Have a great day everyone!