North America

What is a Term Sheet or an Expression of Interest?

LOI
December 15, 2014

Written by: Stephen Reisler

A Term Sheet or an expression of interest (EOI) is an informal offer made by a strategic or financial buyer for the purchase of a business. An EOI can also be referred to as an Indication of Interest or an IOI. Generally it is drafted in the preliminary stages of the acquisition of a business or assets, and can be a useful method for expressing a non-binding intent to purchase. While legally exempt, the EOI may be used to notify a business of a potential buyer’s interest in making an acquisition, while stating in common language the conditions under which they plan to move forward with the transaction.

Think of the EOI as akin to a father asking his daughter’s date, “What are your intentions with my daughter, young man?” The expression of interest provides an overview of Buyer’s intentions and sets the stage for what the final deal will (well, may) look like.

 An indication or expression of interest may sound like a teaser, and in some ways it is. A teaser is compiled by a Seller (or a Seller’s intermediary); but an EOI is created by the Buyer. Essentially, the EOI is the Buyer’s teaser.

 The teaser is most often an anonymous document that explains the basics of the company for sale: products, customers, revenues, profits. However, the EOI isn’t anonymous; it’s the specific prospective Buyer’s first volley, expressing the Buyer’s interest in writing.  

 As a rule, a Seller shouldn’t meet with a Buyer until he knows that Buyer’s intentions. An EOI is simply a quick way for a Buyer to say to a Seller, “We’re interested in doing a deal.”

 The primary purpose of this letter or note, is to suggest a valuation range that a buyer is willing to pay for a company. The document goes on to say, “Based on the information you’ve provided us, we’re interested in buying your company and are willing to pay a price somewhere between X and Y.” The key component of the EOI is the valuation range. The mere existence of a valuation range helps elevate the offer to something more substantial than a simple discussion. Putting words to paper with a signature is a significant and powerful first step. An actual letter is ” harder to blow off than a phone call or seemingly casual comment offered on the 18th hole.”

 The letter may also include additional higher level conditions or qualifications the prospective buyer may require, that can be weighed against the seller’s expectations. These other conditions could include the anticipated timing for closing the transaction, the acquisition rationale, the transaction structure, the sources and use of funds, the length of time the seller may be required to remain with the business and in what capacity, and any other areas that would help a seller decide if the buyer would be a good fit.

The letter is typically written in a casual, yet straight-forward manner.It outlines the basic structure of the deal, including the specific assets and stock that the prospective buyer intends to purchase. It clearly expresses the amount of money or “consideration” being offered, and whether payments will be in cash or in other forms, as well as the anticipated timing of payments to be made up-front and/or over a specified length of time. It maydetail the conditions for negotiating the acquisition deal, including whether or not the buyer desires exclusivity during the early negotiation process between parties.

Usually, the letter ends with a specific statement informing the reader that the letter is, in fact, non-binding, and likely contains some legal-weasel words about it “not constituting an actual offer”.  The rationale behind including such clauses, is that it allows the prospective buyer the flexibility to change their mind as the acquisition moves forward. It also further distinguishes this from the much more formal letter of intent which is a legal document.

Typically, transaction advisors representing a seller request an EOI as early as possible in the sales process, so that their seller can select the preliminary buyers with whom additional due diligence and management meetings will be conducted. The EOIs received are used by the transaction advisors in order to separate potential buyers into a smaller, more realistic list of qualified buyers that may be a good fit for the seller they represent. A Term Sheet or an EOI is prepared and delivered after the buyer reviews the Confidential Information Memorandum (CIM), but prior to meetings with management and initiating any due diligence. Sometimes this is done directly by the prospective buyer without the assistance of the buyer’s legal counsel. Both parties should understand that the purpose of the EOI is simply to qualify an interest, and to not waste additional time and money, unless there is a mutual consent to continue along the path toward a possible transaction.

 While even an LOI may not be binding, it is much more formal document and is typically issued once some due diligence has been completed, and the buyer has fully vetted the valuation and terms of the deal being offered. Often, transaction advisors representing the seller will use the solicitation of EOIs as a way to avoid having to later negotiate the material terms in the LOI creation process.

At the time an EOI is being prepared, the seller and his/her representatives maintain the strongest leverage prior to the execution of an LOI, when the scales are dramatically tipped in favor of the Buyer. Most Seller’s wish to remain “in the driver’s seat” for as long as possible in the Sale process. This is their comfort zone and a well done EOI serves the purpose of keeping the Seller in control, while allowing them to begin feeling more relaxed and at ease with moving the process forward toward a successful closing with like-minded prospective buyers.