What is a Letter of Intent or an LOI?
If you’re considering selling or purchasing a business, you’ve likely heard of a letter of intent, sometimes called an LOI or intent letter. So what is it, and why do you need one?
A letter of intent is a non-binding (usually) offer to purchase or sell a business. An LOI lays out the blueprint for the subsequent business purchase and sale. It also shows both parties that they are serious before expending significant time and resources putting the deal together. Establishing the big pieces of the deal, gives both the buyer and the seller the opportunity to see early on if they are on the same page regarding the transaction.
Terms that should generally be included in a good LOI:
- The parties to the deal.
- The purchase price and how it’s going to be paid.
- The type of transaction. Is this going to be an asset purchase, a stock purchase (or membership interest purchase), a 338(h)(10) exchange, etc.?
- Specific exclusions or inclusions in the business purchase.
- The estimated closing date.
- Confidentiality requirements, though parties should strongly consider putting a more formal non-disclosure agreement in place.
- Contact people to discuss the deal terms and organize the due diligence process.
- The due diligence process and any special restrictions or timing issues.
- Special contingencies.
- An expiration date if the parties are unable to agree on the terms of the purchase agreement.
- Employment or consulting agreement requirements.
- The general terms of any non-compete and non-solicitation agreements.
What does “Non-Binding” mean and how does it apply to an LOI?
The term “non-biding” is often made in connection with a letter of intent. While a well-drafted LOI is normally non-binding, the term can be deceiving. To say that an LOI is entirely non-binding is generally incorrect, and most buyers and sellers want certain provisions of the LOI to be binding. For example, certain elements of the LOI are binding, like the terms regarding confidentiality, exclusive dealing, publicity, the term of the LOI, expenses, and governing law. Usually, what shouldn’t be binding is the obligation to actually go through with the transaction.
Due Diligence after the LOI
Because parties agree to the letter of intent at the beginning of negotiations, the parties will still need time for due diligence to determine if the deal is feasible. Without actually seeing any contracts, corporate documents, employment agreements, financials, tax returns, etc., the buyer can’t be expected to agree to a binding offer to purchase the seller’s business. At the same time, the seller also needs to conduct due diligence on the buyer to determine if they are actually able to consummate the transaction.
Parties who rush through or underestimate the importance of a letter of intent do themselves a disservice, which ultimately could cost the deal. The LOI sets the tone for the resulting business acquisition. The parties should carefully consider what terms are critical in the deal and agree to them early on. If something is left out of the LOI, it isn’t to say that it can’t be included later, but it’s always easier to get things into the final purchase agreements if they’ve been negotiated and included in the LOI. Entering into a business deal without an LOI could result in both parties spending considerable extra time and money negotiating a deal that ultimately falls through.
The attorneys at MLMW regularly represent businesses and individuals in mergers and acquisitions and are available to assist both buyers and sellers from the inception of a deal through closing.
Mallon Lonnquist Morris & Watrous, PLLC is a business, transactional, real estate, and litigation law firm in Denver, Colorado. The attorneys at MLMW regularly represent businesses as both sellers and buyers in a range of business and M&A transactions.