A Letter of Intent (LOI) is a document that is used between two or more parties to set forth the key terms and conditions of a proposed transaction, without forming a legally binding contract.
Why do I Need a Letter of Intent?
The main purpose of an LOI is to ensure that all parties are “on the same page” with respect to the essential terms of the deal before taking any further action. A well-drafted LOI can avoid potential “deal breakers” and assist parties with negotiating the final terms of a binding definitive agreement.
What Information is Included in a Letter of Intent?
The components of an LOI may differ depending on the type and scope of the transaction. As a guideline, a typical LOI may include the following:
Determining the structure of the deal, such as a:
- share purchase transaction;
- asset purchase transaction; or
Consideration on payment options for the acquisition:
- All cash
- All or portion of stock
- Promissory Note
The expected timelines and deadlines for the buyer to conduct due diligence. The due diligence may include:
- the seller’s financial books;
- employee records;
- tax and legal documents;
- personal property registry search; and
- government and court records to confirm asset ownership and/or uncover hidden debt or liabilities.
A list of conditions upon which the successful completion of the transaction will depend. These conditions may include:
- the buyer being satisfied with the due diligence;
- the buyer arranging financing;
- the buyer obtaining a new lease agreement, or an assignment of lease; and/or
- both parties entering into a definitive agreement.
Covenants and Other Binding Agreements
Will any restrictive covenants be required to protect the interests of either party such as:
- a non-compete clause;
- a confidentiality clause; and/or
- a non-solicitation clause.
Binding or Non-Binding Terms of the LOI
Although the Letter of Intent is a non-binding agreement, parties may state that some provisions of the LOI will be binding. Some of these binding provisions may include:
If the prospective transaction contains sensitive information, the parties may want to agree that the terms in the LOI are confidential and subject to a non-disclosure agreement (NDA).
The buyer will normally want to include a “no shop” clause, whereby the proposed seller agrees to exclusively deal with the proposed buyer. This ensures that the buyer feels comfortable spending time, money, and energy on due diligence, without worrying about the vendor “shopping the deal” to look for better offers.
This provision states that each party is responsible for paying for their own expenses and fees incurred during the process, unless stated otherwise. Some of these costs may include legal fees, accountant fees, document fees, travel expenses, etc.
This provision sets forth a clear and executable process which allows the parties to resolve any disputes arising out of the LOI.
Although a Letter of Intent is a non-binding agreement (with the exception of binding provisions), it’s beneficial to have an LOI drafted when pursuing a business acquisition. This document can help facilitate a smoother transition to a finalized definitive agreement.
If you are looking to buy or sell a business and require assistance in drafting a Letter of Intent, please call (778) 565-4700 or simply fill out our contact form to schedule a free consultation today.
The preceding content is for informational purposes only and does not constitute legal or professional advice. To obtain such advice, please contact our offices directly.