Understanding the Importance of an LOI

One of the first and most critical steps in selling or acquiring a company is the Letter of Intent. It is one of the first opportunities for mistakes to be made. Let’s take a look at why LOIs are so critical to your success in completing a transaction.

What is an LOI?

Almost exclusively used as the first step in the process of major business transactions, a letter of intent (LOI) is a document declaring the preliminary commitment of one party to do business with another. Presented in a letter format, it outlines the chief terms of a prospective deal. LOIs can be iterative in nature, where one party may present an LOI to buy a business, and then the seller may counter with a tweaked version of that LOI or they may draft a new document altogether. Ideally this process saves negotiation time in the long run, so that when both parties come together to formalize a deal, the broad strokes of the deal will already be hammered out.

What may be included in an LOI?

While not an exhaustive list, here are some elements that are often addressed in an LOI:

– Type of transaction — asset deal or stock deal?

– A list of the assets to be sold in the transaction

– The purchase price for the business and all its stated assets

– Exclusivity period parameters

– Expected length of time for due-diligence to occur

– Definitions of important terms that might be used during the transaction

– A target date for the execution of the purchase agreement

– Identification of transactions jurisdiction and governing entities

– “No-solicitation” provisions, which forbid one party from poaching the other party’s employees

 

It is important to reiterate that an LOI signals the beginning of a formal business transaction. As such, it is critical that sellers understand what they are signing and consult with their professional advisors before executing a LOI. Yes, even before sending a “quick text” to confirm receipt – any and all written communication can affect the terms of your future agreement.

Is an LOI legally binding?

It depends, which is why it is critically important to seek legal advice as soon as an LOI is received. Some LOIs are not binding at all. Others may only create limited obligations like maintaining confidentiality and ensuring each party bears their own expenses. In contrast, some LOIs may qualify as an enforceable contract with or without additional negotiation, possibly even serving as the contract if you don’t sign the final agreement.

Letters of Intent are an exciting part of the M&A process. They also herald a significant event, the sale of a business, so seeking experienced advice is critical. We work with privately held business owners across the United States who are interested in selling or recapitalizing their companies. Our team has over 100 years of combined experience in these transactions. Please contact us for a confidential discussion about how we can help you.