Mon, May 17th, 2010 A Letter of Intent ( "LOI" ) is a preliminary agreement entered into between a buyer and a seller summarizing the negotiated and agreed upon transaction terms & conditions. Most LOI's clearly state that the document is non-binding on the parties and is intended to serve as an outline of the key business terms to be incorporated into a Definitive Purchase Agreement and other ancillary documents. LOI's are also sometimes referred to as term sheets, non-binding term sheets, deal points, etc.
The LOI should spell out the key business agreement points and contingencies, without going into unnecessary specific detail or legal specifics. It enables the parties to determine if they can reach agreement on the "broad strokes" of a transaction, knowing that the finer points will fall into place during the drafting and negotiation of the definitive agreements.
It includes a description of the transaction ( i.e. is the transaction a stock purchase or an asset purchase? ). It should also clearly set forth the parties involved and whether an individual or a corporate entity is making the purchase.
It is important to clearly define the purchase price or method of determining the purchase price, along with any potential price adjustments ( i.e. based on Y-T-D performance, closing balance sheet, etc. ). It should address payment terms of all component parts, including cash, notes, assumption of liabilities, earn-outs, etc.
It should clearly state what assets are included and excluded as part of the transaction. Common questions that LOI’s address include:
All of these items have a significant impact on the total pre-tax and after tax yield of the transaction.
LOI's usually also spell out the intentions of the parties with respect to the transition, setting forth how long the seller will remain with the buyer in an employment or consulting capacity, following the closing. It may or may not include the specific compensation arrangements between the parties.
The parties should also document any contingencies that must be met in order for the transaction to proceed to closing. Common contingencies include financing, environmental clearance, the ability to transfer or obtain licensing or approvals from regulatory agencies, due diligence (financial and legal), lease transfer, etc.
The LOI will outline the scope, procedures and the time frame that the buyer must abide by in conducting his due diligence and confirming approval. It should also provide for the level of access that the buyer will be given.
A buyer may desire a provision requiring the seller to deal exclusively with the buyer for an agreed upon period of time. This is also referred to as a "No-Shop" Provision or a "Standstill" Agreement.
The purpose of LOI's can vary; however, in our experience it is a vital component of the business sale process. Done correctly, it maximizes the probability of a successful transaction and also tends to "smoke out" situations that are not likely to lead to a closing, thereby saving time, money and protecting confidentiality in the process.
