When negotiating a commercial transaction for the purchase and sale of a business, many parties begin the legal process by entering into a letter of intent (“LOI”). An LOI outlines the key business terms of a proposed deal which have been agreed upon by the parties to a transaction. Further, as much time and energy can be spent finalizing an LOI, it also demonstrates a commitment on the part of both parties to pursue further negotiations and devote the resources necessary to complete a transaction.
The main features of an LOI include the following:
A typical LOI will explicitly state that the provisions relating to the business terms of the transaction are “non-binding”. The “non-binding” nature of such terms means that they can be modified, amended, or entirely removed as a prospective purchaser learns more about a business through its due diligence investigations. Typical non-binding provisions of an LOI include terms that deal with whether shares or assets will be purchased, the purchase price, how that purchase price will be paid, and whether there will be any non-competition and/or non-solicitation covenants. Despite the fact that such terms are non-binding, these provisions remain significant as they effectively establish a roadmap of the key components of a transaction that the parties have agreed to, which are then further expanded upon in an agreement of purchase and sale and other ancillary documents.
Exclusive Dealing Provision (aka. No-Shop Clause)
An LOI will include a binding provision whereby a seller agrees to refrain from negotiating with, making offers to, or considering proposals from, other parties for the sale of a business. The length of this “exclusive dealing” period is specified in the LOI. This restricted period allows a potential purchaser to proceed with expending the resources required for further due diligence and negotiations without being concerned that a seller is simultaneously shopping around for a more lucrative offer.
The confidentiality provision of an LOI is another important component of the document whereby the parties agree that a significant amount of confidential and proprietary information belonging to each of the parties will be shared and exchanged during negotiations and investigations relating to the transaction. Accordingly, the parties agree that they will take all measures necessary to maintain confidentiality, not only during the process, but also after the LOI terminates or expires. Should the deal not proceed, both parties would like to ensure that their respective confidential business information is protected and, in no event, is divulged to any unrelated, third party.
As a document that provides a blueprint of essential business terms which are later incorporated into a binding agreement of purchase and sale, and also conveys a desire on the part of all parties to take a commercial negotiation “seriously”, an LOI is a beneficial tool for prospective purchasers and sellers.
Please note that this is a short summary of provisions commonly included in a letter of intent and is not meant to be legal advice or an opinion on any matter. If you are interested in obtaining more information about having a letter of intent prepared, please contact us