M&A Blog Series V: What is a Letter of Intent?
M&A Blog Series V: What is a Letter of Intent?
September 05, 2017

Welcome to the final installment of the Hunter Business Law Mergers & Acquisitions blog series. For a recap on stocks or asset sale, differences between an M&A broker and an advisor, baskets and caps, and sandbagging provisions, please refer to our previous blogs.
Ok. So let’s say you’ve met with a broker or advisor, and after getting some of your ducks in a row, now you have a potential buyer. Enter a Letter of Intent (“LOI”). Typically, this letter will be drafted by the buyer’s business law attorney, and it will include most of the terms the buyer is amenable to comply with.

Terms that are usually included in a Letter of Intent:

One of the first things we at Hunter Business Law like to stress repeatedly is that since every business is different, needs are going to vary from one situation to the next. The same applies to Letters of Intent. They could vary in length depending on the type of the sale; but generally, they would include a proposed purchase price, terms of payment, whether it’s a stock or asset sale, whether certain employees will stay on board after the transaction, etc…

It is different from a purchase agreement because it is not binding; but it provides an outline of what the buyer expects to get from the sale of the business. However, these terms are not set in stone. Each party is under the obligation of conducting their own due diligence, which may modify some of the proposed provisions.

Terms that should always be included in a Letter of Intent

Confidentiality: Regardless of your business’ circumstances, it is crucial that you include a confidentiality term on the Letter of Intent. This is because during the initial negotiations of a potential sale, you will be discussing information that you don’t want disclosed to third parties. While the rest of the LOI wouldn’t be binding, due to its sensitive nature, a confidentiality provision will be held to a higher standard. Clearly state that such specific provision is binding; or better yet, enter into a confidentiality agreement beforehand.

Exclusivity: Working out the kinks for the sale of a business is costly and onerous. Make sure you are only negotiating with serious potential buyers who are acting in good faith. If a potential buyer is in preliminary talks with five different businesses, your chances of finalizing the sale are greatly diminished.

Parties are not bound: Cover your bases by making sure to specify that the LOI is only a preliminary document, and although the parties agree to enter into negotiations in good faith, neither one is bound to finalize the purchase. This way, if through due diligence you find out that the transaction is not in your best interest, you have a way out.

If you are thinking of selling your business (or purchasing someone else’s), it’s essential to have an experienced business law attorney reviewing all your documents. Let Hunter Business Law help you.

This Blog was written by Hunter Business Law Founder, Attorney Sheryl Hunter. View her profile HERE.

DISCLAIMER: THIS BLOG IS FOR EDUCATIONAL PURPOSES ONLY AND DOES NOT OFFER NOR SUBSTITUTE LEGAL ADVICE. ADDITIONALLY, THIS BLOG DOES NOT ESTABLISH AN ATTORNEY-CLIENT RELATIONSHIP AND IS NOT FOR ADVERTISING OR SOLICITATION PURPOSES. ANY OF THE CONTENT CONTAINED HEREIN SHALL NOT BE USED TO MAKE ANY DECISION WITHOUT FIRST CONSULTING AN ATTORNEY. THE HIRING OF AN ATTORNEY IS AN IMPORTANT DECISION NOT TO BE BASED ON ADVERTISEMENTS, OR BLOGS. HUNTER BUSINESS LAW EXPRESSLY DISCLAIMS ANY AND ALL LIABILITY IN REGARD TO ANY ACTIONS, OR LACK THEREOF, BASED ON ANY CONTENTS OF THIS BLOG.

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