Understanding Letters of Intent

A letter of intent (also known as an LOI) is a written document that outlines the agreement in principle between two or more parties regarding a proposed business transaction. As an outline of terms, an LOI is similar to a term sheet or memorandum of understanding. However, while the outlined terms are generally non-binding, an LOI may contain binding agreements of the parties with regard to certain matters.

The purpose of an LOI is to confirm a set of non-binding terms and conditions of a proposed transaction that is sufficient for the parties to commit further time and expense to pursue the transaction. An LOI is typically initiated by the buyer and its terms generally include the following:

• Purchase price and how it will be paid
• Whether is it a stock or asset purchase
• Asset to be purchased
• Liabilities to be assumed, if any
• Period during which the buyer may conduct its due diligence and the parties may negotiate the terms of the definitive agreement
• Proposed closing date of the transaction
• Non-competition covenant from the seller and/or its owners
• Any transition services expected to be provided by the seller and/or its owners or officers
• Any conditions to closing, such as consents of landlords or material customers, continued employment of key personnel, and no material adverse change in the financial condition, business, operations or prospects of the subject business
• Confidentiality provisions
• An exclusivity period during which the seller will only deal with the prospective buyer on the proposed transaction, and any termination fees or expenses for which the seller will be liable for an early termination of exclusivity
• Any brokers’ fees that may be payable in connection with the closing of the transaction
• A date by which the seller must respond or the LOI will expire

The major efforts following the LOI include the preparation of a definitive agreement for the transaction and the buyer’s due diligence review regarding the subject business. The due diligence review allows the buyer to confirm that the actual condition of the subject business is as it was represented to the buyer in the seller’s marketing materials or other prior disclosures.

As noted above, the terms of an LOI are generally non-binding. However, the confidentiality and exclusivity provisions are typically binding. Thus, if the buyer breaches confidentiality regarding proprietary information of the seller, it may be subject legal action by the seller and, if the seller breached the exclusivity provision granted to the buyer, it may be subject to termination fees or expenses and/or legal action by the buyer to enjoin the seller’s activities with the third party and for damages resulting from the buyer’s lost opportunity.

Given the significant transactions contemplated in LOIs, the parties frequently have multiple advisors involved in the transaction and the preparation of the LOI. Attorneys give guidance on legal exposure, drafting of the definitive documents and the terms of the LOI. Brokers are involved in introducing buyers and sellers, formulating the deal structure, and negotiating the definitive agreement. Accountants are involved in the due diligence review, guidance on tax implications, and advising on purchase price allocation. Wealth advisors may also play a role in structuring the transaction to achieve financial and estate planning goals of the parties.

If you or your business is in need of advice regarding an LOI or any other aspects of a purchase and sale transaction, the business attorneys at Poole Shaffery would be happy to be of assistance to you.