Do’s and Don’ts of LOIs

When drafting a letter of intent for the sale of a business, buyers and sellers should keep in mind the following legal tips on what to do – and what not to do:

Do’s:

• Clearly state the intent: Clearly express the parties’ intent to enter into negotiations for the sale of the business. Include essential details like the purchase price, assets involved, assets omitted, and proposed timeline.

• Confidentiality clause: Include a confidentiality provision to protect sensitive business information shared during negotiations if a standalone confidentiality agreement is not already in place.

• Specific terms: Outline key terms and conditions that will be negotiated further in the formal agreement, such as due diligence, representations, and warranties.

• Identify financing sources: With one party bringing cash or other consideration to the table, where that is coming from is a key consideration in the process and timeline.

• Set the table for due diligence. Often, due diligence will need to proceed before definitive agreements are in place so key due diligence deliverables – such as third-party reports with lead times and meetings with landlords, customers, and employees – will need to have expectations set.

• Termination clause: Include a termination clause to define the circumstances under which either party can withdraw from negotiations without legal consequences and consider a “drop dead” date to prevent dormant deals from hindering future opportunities.

Don’ts:

• Binding commitments: Avoid including – and expressly disclaim – any binding provisions that could lead to unintentional legal obligations before the final agreement is reached.

• Excessive detail: Unless the circumstances of the deal warrant in depth coverage on one or more key or complex business points, keep the letter concise and avoid unnecessary elaboration on terms that will be discussed in-depth during the formal agreement process.

• Ambiguity: Be clear and precise in your language to prevent misunderstandings and potential disputes.

Takeaway:

Remember, an LOI sets the stage for negotiations but is not the final agreement. With that said it’s important for the document to be structured correctly and address key business and legal issues in such a way that the ultimate purchase agreement document package can be prepared without renegotiating the basic business deal.

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