A letter of intent (LOI) is often assumed to have little function beyond establishing the principal terms of the business sale transaction. This assumption, however, can prove to be costly, as it fails to recognize that the LOI serves as a blueprint for the deal-making process.
Setting the table.
The LOI is about expectations. Even if the LOI is non-binding, it is typically difficult to amend communicated deal points later when it comes time to formalize the purchase agreement. A common refrain is the LOI constitutes an expression of intent that is not to be altered if buyer is to continue forward. Conversely, a buyer may refuse to add terms for the sole reason that they were not included in the LOI. For these reasons, a seller has greater leverage before signing the LOI, so it is imperative that seller negotiate accordingly.
Seller’s deal agenda.
When drafting the LOI, the seller should be able to identify specific answers to the following questions:
- What is being purchased?
- What is the purchase price and how will it be paid?
- What assumptions are being relied upon to support the purchase price?
- How is due diligence to be performed?
- What are the conditions to closing the deal?
To avoid unwanted surprises, basic terms should also be considered for the following topics:
- Confidentiality of seller information
- Representations and warranties
- Closing deadline
- Employment of seller’s principals and plan for seller’s employees post-closing
- Seller non-competition clause
- Responsibility for paying deal-related costs
- Boilerplate language important for deal enforcement
Lastly, there are common protection provisions to guard against negotiation-related claims:
- Non-binding disclaimer, with exceptions such as exclusivity periods for negotiation
- Disclaimer of buyer reliance on information provided by seller
A seller should begin with the end in mind. If the seller approaches the LOI as an outline for the deal they want, the better they will be able to negotiate their way to that result.
Strobl Sharp is a team of experienced and trusted lawyers that can advise on all matters related to the sale of a company and mergers and acquisitions. For more information, visit Strobl Sharp online at www.stroblandsharp.com or on LinkedIn.