NBIO, LOI or Term Sheet? What should I use?

I love deal sheets. I really love deal sheets! I REALLY REALLY LOVE DEAL SHEETS!

I cannot tell you how much I love deal sheets. For me, it is one of the few times that creative deal structuring combines with legal nuance to produce a document which should, if correctly outlined, reveal the ‘transaction plans’ for the seller, the buyer and their deal teams.

This transaction plan also signals a very important step for a buyer and seller. For the buyer, it represents a step towards investment in, or ownership of a desired asset. For the seller it represents the realisation of hard work and places a value on their business. It can personally mean retirement or the reduction of a mortgage or the acquisition of that boat they have always wanted.

Like renovating or designing a house, transaction plans should be drafted carefully with insights from various members of the deal team but driven, in my view, by a single ‘architect’.

Recently I have been engaged more and more to draft this transaction plan or offer letter incorporating findings from other advisors or the client. In each instant, I have had similar conversations as to the format of the document.

“Should it be a Non-Binding Indicative Offer (NBIO), a Letter of Intent (LOI) or a Term Sheet (TS)? Actually…wait, what is the difference?”

What is a…

Non-Binding Indicative Offer (NBIO)

Purpose/Message

An NBIO is usually a long form letter which outlines who the buyer/investor is, why the buyer/investor is a good fit for the seller, a glimpse as to the future for the target under the buyer/investor and outlines the core transactional elements.

Typically, we see NBIOs in transactions of ‘substance’ and are commonplace in the private equity arena. In my view, the core reason for this is that the complexity of earn outs, valuation methodologies, future upside realisation, offer construction and relational nature of growth investing. NBIOs often contain value statements as to why the investor/buyer is a good fit as well as the standard core transaction details such as:

  • Parties
  • Key definitions
  • Transaction structure
  • Purchase price
  • Consideration structure
  • Due Diligence structure & timing
  • Key conditions; and
  • Aspects which are binding on each party like confidentiality, exclusivity etc.

Audience

Given the complexity commonly found in transactions where private equity is involved, NBIOs are typically drafted with a professional audience in mind, who possess a very strong understanding of written and spoken language, as well as an advanced understanding of common deal terminology.

Summary

NBIOs have a distinct purpose to marry the relational rationale with the transaction details. Their intended audience are typically executives and advisors who possess a strong understanding of terminology and written language. Their message is often complex by nature, lengthy and seeks to ‘reason’ with the seller by positioning the buyers/investors value.

Letter of Intent (LOI)

Purpose/Message

An LOI is a letter which outlines the intent of one party (buyer) in relation to the transaction involving the other (seller). LOIs typically including binding and non-binding aspects related to the deal.

A good LOI should sit between an NBIO and a Term Sheet, should clearly understand the audience and be formatting in a way to convey the message with clarity.

LOIs are generally wordy and set out in long form key parts to the transaction including:

  • Parties
  • Key definitions
  • Transaction structure
  • Purchase price
  • Consideration structure
  • Due Diligence structure & timing
  • Key conditions; and
  • Aspects which are binding on each party.

We typically see LOIs in SME to lower mid-market transactions and are fairly widespread in the American influenced Search Fund and Entrepreneur through Acquisition (ETA) space.

Audience

Given the proliferation of the use of LOIs in the search and ETA space, they are often ‘templatised’ with the audience being a hybrid of brokers, advisors and owner operators.

Summary

Getting the purpose, audience, and message right is critical. Recently, the draft LOIs we have seen have been too wordy, impersonal, and attempted to be a hybrid between a term sheet and an NBIO. This has resulted in a Frankenstein document with a confused purpose, audience, and message.

In my view LOIs are a waste of time in the SME and Lower-Mid Market. They ignore the audience in a desire to be ‘private-equity-like’.

Term Sheets

Purpose/Message

A Term Sheet is a clearly formatted document that outlines the core terms to a particular deal. They include binding and non-binding elements.

Term Sheets are the format of choice when negotiating complex contracts as they convey information clearly, can be edited easily, and get to the point. Term Sheets should not include waffle or anything that does not aid in closing the deal.

Term Sheets generally contain all the typical aspects that a good NBIO or LOI contain without the value setting or relational aspects to the deal. Whilst this straight talking, non-nonsense approach is appealing it can be a little on the cold side.

Audience

Term Sheets are perfectly designed for SME owners and lower-mid market owners. If your deal size is less than $15m or involves an owner operator or family run business, I would strongly suggest a Term Sheet over an NBIO or LOI.

In my experience, family-owned businesses and SME operators prefer to understand the deal in basic terms:

  • What is my business worth?
  • How will you pay me?
  • When will I get my money?
  • What risk is on me?

Summary

If you are considering an SME, a family-owned business, a transaction under $15 million, or a transaction involving a broker, I strongly suggest that a Term Sheet is the best method for conveying your offer and key terms.

Ideal Approach

Whether you opt for an NBIO, LOI or Term Sheet, each has its pros and cons.

I believe that we should not lose sight of the Purpose, Audience and Message when making a formal offer.

In my view, the purpose is to convey our offer in the most understandable way. The audience is the intermediary (broker, advisor, accountant or lawyer) AND the seller AND their family/friends. The message is:

  • We like your business and would like to buy it.
  • We think we are a good fit for your business.
  • This is what we would like to do with your business.
  • Your business has a value to us.
  • This is how we will pay for it; and
  • Here are some key terms to start the process.

I believe that in the SME and lower-mid market a relational approach is required.

This involves:

  1. Reviewing material given by the intermediary if brokered in a timely manner.
  2. Researching the target.
    1. Website
    2. Socials
    3. Industry pages
    4. Google search
    5. ASIC company extract
  3. Meeting with the seller face to face and listen.
    1. Understand their story.
    2. Understand the business.
    3. Understand their reasons for selling.
    4. Understand their motivations for selling.
    5. Reveal your position if you are interested.
  4. Build the Model
    1. Request further details if required.
  5. Construct the Offer Letter. 
  6. Present it face to face.
    1. Explain what you want to do.
    2. Explain why you want to do it.
    3. Explain how you will do it.
    4. Listen to their feedback.

The above process will give colour and meaning to any document you present, whether it is an NBIO, LOI or Term Sheet. However, I do believe that the above coupled with my Ideal Offer Letter will certainly increase a buyer’s chance of closing a deal.

Ideal Offer Letter

After reading and drafting many NBIOs, LOIs and Term Sheets I have developed the Ideal Offer Letter. It is a combination of the NBIO and the Term Sheet which is aimed at reinforcing the relational aspects of the Ideal Approach whilst outlining the offer in plain language appropriate to the seller. It can be made more complex or made simpler depending on your audience. 

My Ideal Offer Letter has 2 key parts.

Part 1 – Relational Reinforcement

This part succinctly and personally conveys who the buyer/investor is, their motivations, why they are right for the business, and their intentions with the business after acquisition. It should be real and honest.

It should be a letter addressed personally to the owners by their names, just like you would write to your grandma. It should reflect that time was set aside to craft the Offer Letter. 

The Audience: The sellers.

The Purpose: To convey in writing why you are the ideal buyer or investor for the target.

The Message: Relationally, we are right. Financially, we are right. Let’s get a deal done.

Part 1 Sample Headings

Who is [insert Company Name/Group]

What we like about [target]

Why [group] is the right buyer/investor for [target]

What are our intentions with [target] after acquisition

The Deal Terms

Part 2 – The Term Sheet

This part takes the form of a term sheet. Clear, concise and comprehensive. The seller will clearly be able to understand the terms of the deal. All parties know their respective rights and roles with a clear plan as to how the transaction will work.

Sample

I have included a downloadable sample of an Ideal Offer Letter. Click below to get access to our FREE Ideal Offer Letter. 

Offer Letters are critical in getting a deal done. Like building plans, they need to be clear, concise and comprehensive. They should outline the why, the what and the how, in a way that reflects their purpose, audience and message.

Like I said at the beginning, I love deal sheets and Offer Letters, and would love to help you get yours right!

Source link: https://www.franklaw.com.au/blog/nbio-loi-or-term-sheet-what-should-i-use by jfrank@franklegal.com.au (James Frank) at www.franklaw.com.au