The “letter of intent” or “LOI” is often the first step in a business acquisition. The LOI is an informal way to set the basic terms of the deal or get the negotiations on the terms started. However, sometimes the “standard” terms can have a binding legal effect on the parties. Let’s talk about what should be in the letter of intent, and what can be included to preserve a potential deal while those negotiations are taking place.
What Goes In The Letter of Intent
Generally speaking, a letter of intent should contain the bare outlines of the proposed transaction. This can include
* Purchase price
* Payment terms such as seller financing, earn-outs, and post-closing adjustments
* Proposed financing terms
* Post-purchase seller assistance
* Timeline for completing the transaction
* Exclusivity clauses (also known as “no shop” clauses) so that the seller does not use your proposal to shop buyers for a better price
* Confidentiality agreements to protect the information that will be exchanged while the parties evaluate the deal
* Earnest money forfeiture provisions
In the letter of intent, these terms should have some meat to them. You can say “I want to buy your business” but that really only conveys a vague intent to the seller. There’s nothing for the seller to evaluate before turning over his valuable due diligence materials.
Better to flesh out the purchase terms. For example, “I want to buy your business for $1mm dollars, payable 70% on closing and 30% after confirming that the preceding quarter’s sales numbers are consistent with the last two year’s earnings”. This tells the seller exactly what it can expect from the deal, and also sets the payment terms.
“This is a Non-Binding Offer” May Not Be True
Most often you will see something like “this is a non-binding offer” and some other jargon in the letter of intent. Depending on the LOI as it’s written, that may be true. And especially if you just copied some junk off the Internet.
Conversely, it may not be true. More often than not, in the deals I’ve worked on, the purchase price changes, financing changes, post-purchase seller assistance is negotiated, and pretty much always the timeline changes. No one is going to sue the other party if the deal doesn’t close on the timeline set out in an LOI.
On the other hand, no-shop clauses, confidentiality agreements, and earnest money forfeiture provisions can be legally enforced.
You Don’t Have to Include the Legally Binding Stuff
That said, you don’t have to include the legally binding stuff in your LOI. But you should consider including at least the confidentiality provisions and the earnest money forfeiture provisions. Due diligence comes at a cost in man-hours, accounting and legal review, and employee/owner time. Similarly, most businesses wouldn’t want their financials and pricing information being disclosed to the Internet, or, if the buyer is a competing business, used by the buyer in its own operations if the deal fails.
Conclusion
Having a lawyer like myself review or even draft parts of the letter of intent is a low-cost way to protect either side of the transaction. You can contact me for this or any other commercial transactions at palermo@palermolaw.com or (312) 671-6453.
Check out these other business law blog posts while you’re here:
