A carefully drafted letter of intent is typically the “agreement in principal” entered into between two parties entering into a business transaction. A letter of intent (“LOI”), or sometimes referred to as a Memorandum of Understanding (MOU”) or Term Sheet, is a document used to memorialize some of the basic terms of a prospective transaction, as well as express the parties’ commitment to entering into a formal purchase and sales agreement. A letter of intent is typically used for asset and business purchases, stock or membership interest purchase and sales, equipment purchase and sales, as well as company mergers. The letter of intent is an effective tool of making a seller more comfortable in dealing with the buyer, and will encourage the seller to discontinue any efforts to market and sell the asset.
The most traditional feature of a letter of intent is that the agreement is non-binding. In other words, the parties are not yet entering into a valid and enforceable contract that commits both sides to the deal. Typically, a letter of intent will outline certain conditions and contingencies that will allow the parties to walk away from a potential deal without any liability. These conditions and contingencies can range from financing to inspection of the books and records to other due diligence issues. The letter of intent should have a firm deadline, with conditions for extensions, for entering into a formal purchase and sale agreement.
If the letter of intent, or memorandum of understanding, is non-binding for both parties, then what benefits does this document provide to your business?
A letter of intent can assist a Buyer by agreeing to an exclusivity period that will preclude the Seller from negotiating another deal with third party buyer or competitor. The longer and more restrictive the exclusivity covenant, the Seller is more likely to demand more refined deal terms, and resolve some significant issues early on in the negotiation process. The Buyer and Sellers can both obtain the benefits of setting the essential deal terms, such as: the deal structure, payment or consideration, non-disclosure/confidentiality, exclusivity period, indemnification, hold backs and adjustments, retention of management or key employees, as well as the timeframe for signing the purchase and sale agreement, due diligence and closing. The letter of intent provides both parties the opportunity to resolve substantial deal issues and obtain an ethical commitment from each party to those terms. So, the Letter of Intent will serve as the framework for the ultimate transaction.
The Law Office of Stefan Cencarik, PLLC specializes in assisting business owners with all aspects of business and asset purchase and sales, or often termed buy-sell agreements. If you are in the negotiation stage, and have questions about a Letter of Intent, please contact Attorneys Stefan Cencarik at 617-669-9780.