Letter of Intent – Key Considerations Before You Sign
What is a Letter of Intent?
A Letter of Intent is a non-binding document typically presented by a buyer to a seller for the purchase of a business. A Letter of Intent is usually referred to as the “LOI” or may be referred to as a memorandum of understanding or letter of understanding. The LOI is usually prepared in letter form and will set out the key business terms of the deal such as the parties involved, transaction structure, price and payment terms, due diligence items, and the closing date.
If you intend for the LOI to be non-binding, you need to ensure it says exactly that. A properly drafted LOI will clearly state the party’s intention that the LOI is non-binding and that, following the signing of the LOI, the parties will negotiate and enter into a formal purchase and sale agreement. It is also prudent to include subject conditions in the LOI which state that the buyer’s obligation to purchase the business from the seller is conditional on certain conditions being met. A typical buyer’s condition is that the buyer will be satisfied with the results of due diligence investigations.
Exclusivity and Confidentiality
Although most parties intend for the LOI to be a non-binding document, there are certain clauses the parties will want to include in the LOI for their protection which should be binding. Before a buyer starts spending time and money on their due diligence, they will want to ensure an exclusivity clause is included in the LOI. This clause will provide the buyer with exclusive negotiating rights and prohibit the seller from marketing their business or engaging in negotiations with any other party until the LOI has expired. Before a seller starts to share information about their business with the potential buyer, they will want to ensure appropriate confidentiality and non-solicitation clauses are incorporated into the LOI. Such clauses will prohibit disclosure of confidential information and also prohibit the buyer from soliciting employees and customers of the business.
In addition to setting down the key terms for the deal, it is very important to consider the timeline for the transaction and set down clear expectations for completing due diligence, negotiations, and the transaction. A few points you will need to consider include the amount of time required for due diligence; the amount of time your advisors will require to prepare the formal purchase and sale agreement; and, if negotiations and due diligence proceed as planned, at what stage should the buyer pay a deposit. If a final agreement cannot be reached, you will want to set down an end date to avoid the LOI from continuing indefinitely.
A Letter of Intent is a good starting point. It can assist with negotiations and provides a framework for finalizing your business transaction. However, just like any other legal document, the parties should ensure the LOI is properly drafted so the intentions of the parties are clear. If you are looking to buy or sell a business and make use of a Letter of Intent, we suggest you consult with one of our business lawyers for advice.
© Linley Welwood LLP. The contents of this article do not constitute legal advice. Readers should seek legal advice in relation to their own specific circumstances.