Knowledge base item

The importance of a process letter

Expressing expectations in a process letter

A process letter is an important tool to indicate which steps are foreseen with what timelines and what content is expected during each step.

In the merger and acquisition process it is important that mutual expectations between buyer and seller are well managed. On the one hand it concerns content, think for example about the definition of the purchase price. Is this 'cash and debt' free and if so, what are the 'cash' and 'debt' items? On the other hand, when it comes to the process itself: what are the steps and timelines? Experience shows that a process - often emotional - can come under pressure if it is unclear what is expected of each other. The chance of a successful outcome is many times greater if this is well organized.

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A clear roadmap

An important tool of the acquisition advisor is the so-called process letter. This indicates which steps are foreseen with which timelines and what is expected during each step in terms of content. In most cases, the following steps are distinguished: global information phase, confidentiality arrangements towards potential buyers, disclosed information phase (including the provision of an information memorandum), management interviews, indicative bid, binding bid, Letter of Intent, Due Diligence, Sales Agreement and Closing.

Avoid deal breakers

In practice, steps are sometimes merged or rearranged chronologically. The most important reason is the joint assessment of the success of a process and the presence of potential buyers for the underlying proposition. If, for example, sufficient interest is expected for a certain proposition in advance, it is wise to organise the Due Diligence before the definitive bid in order to avoid that the outcome of the due diligence leads to a negative price adjustment in the exclusivity phase. Another consideration is whether or not to include an indicative bidding phase if the expected interest is very high. Potential deviation from price expectations is the most important deal breaker, and it is best to include it early on in the process, but not too early.

In some cases it is better not to

Is a process letter always necessary? It is undeniably an important tool to maintain control on the sales side. Of course, there are always exceptions, such as a bilateral process, where a process letter is probably an overkill. On the Sales side, try to avoid a bilateral process until exclusivity has been granted in order to maintain a good negotiating position. Furthermore, it will always be tailor-made and especially when the transaction size increases, the importance of "professional direction" with the help of a process letter increases.

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Marieke Klaassen
Marieke Klaassen van BeurdenSenior Corporate Finance Advisor

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