Webinar Recap – Navigating the Letter of Intent (LOI): Key Takeaways from ITValuations’ Latest Webinar

On November 20th, ITValuations hosted an insightful webinar, The Transaction Journey: Navigating and Understanding the Letter of Intent (LOI), presented by Aaron Mahl, Greg Northrop, and Corey Kearns. This session provided critical guidance on understanding LOIs for both buyers and sellers, breaking down complex components into actionable advice. Here’s a recap of the key highlights:

What is an LOI?

An LOI, or Letter of Intent, is an important milestone in any transaction, but it’s not set in stone. As Aaron aptly put it, “An LOI is not a tattoo.” Although certain aspects, like confidentiality clauses, are binding, most of the LOI outlines the intent to proceed, paving the way for negotiations and due diligence.

Five Key Components of an LOI

The discussion centered on five crucial elements every buyer and seller should understand:

1. Type of Sale
   LOIs typically define whether the sale will be structured as an asset or stock sale. Each approach has distinct implications for tax and operational efficiency. While stock deals are common in the MSP market, Greg emphasized the importance of tailoring the deal to the buyer’s and seller’s specific needs.
2. Total Consideration and Deal Structure
   The LOI specifies the purchase price and its breakdown—cash at close, deferred payments, and potential rollover equity. Corey advised sellers to consider their long-term financial goals rather than fixating solely on the cash at close.
3. Net Working Capital
   One of the most intricate aspects of the LOI, net working capital, represents the operational balance sheet items transferred during the sale. Greg highlighted the importance of clear parameters, like a defined look-back period and true-up process, to avoid friction during negotiations.
4. EBITDA and Multiples
   While not always included, LOIs often acknowledge a price based on EBITDA or revenue multiples. Sellers should be prepared for adjustments during due diligence, which can impact the final valuation.
5. Timing and Exclusivity
   The LOI typically outlines an exclusivity period (commonly 60-120 days), ensuring sellers do not shop around while the buyer invests time and resources into due diligence.

Advice for Sellers

Corey emphasized the importance of preparation: understanding the “why” behind the sale and aligning personal and business goals. Greg added that tax planning is crucial, particularly understanding whether the proceeds will meet the seller’s net goals post-tax. He advised aligning operations under a single entity to streamline the sale process and reevaluating tax minimization strategies that may inadvertently reduce EBITDA and valuation.

Closing Thoughts

The webinar concluded with a light-hearted trivia game and a preview of upcoming events, including The Top Five Year-End Questions to Ask Your CPA on December 5th. If you’re considering a transaction, understanding the nuances of an LOI is essential. As this webinar showed, the LOI sets the stage for a successful sale but requires strategic preparation and expert guidance.

Interested in learning more? Visit iTValuations.com/events for details on upcoming webinars and in-person events.