A business purchase letter of intent (LOI) is a non-binding document shared between a buyer and seller of a business entity. The agreement is used as a starting point for negotiating the terms of a proposed business deal.
An LOI typically includes provisions for items such as price and any adjustments to the purchase price, how the transaction will be structured, if there will be escrow requirements, an expected timeline for diligence and negotiation, and a range of items related to obligations and restrictions in regards to the transaction.
While the letter of intent on the whole is generally non-binding, there are frequently designated provisions that are binding and they should be very clearly identified in the agreement. Examples of items that are often binding include:
- Confidentiality – As part of the negotiation and sale process, businesses will need to disclose highly confidential information to each other. If the sale were to fall through, your business could be at risk if you don’t protect yourself with a non-disclosure agreement.
- Dispute resolution – In the LOI there may be a specified method for resolving any disputes that arise in regards to the letter of intent.
- Exclusivity/No Shop – There may also be a binding exclusivity/no shop period specified in the LOI. This means that during the specified period, the seller may not “shop” the buyer’s bid and the buyer is to terminate any other sale discussions it may be having.
- Expenses – The LOI will also state how expenses are to be covered. Usually each party will be responsible for bearing their own expenses. You should also include how attorney’s fees will be handled and be sure there is a costs clause in the LOI.
Who Maintains Leverage During Negotiation
The letter of intent is not the end-all, be-all for the sale, but it is a very important part of the sales process and can inform the ultimate terms of the sale – if, that is, the sale goes through.
If you are the selling company, it’s generally advantageous to have the LOI be as detailed as possible, especially when it comes to important factors like price.
Before the exclusivity period sets in, the seller still maintains negotiating power because the buyer knows they may be competing with other bidders. Once there is exclusivity, leverage shifts to the buyer because they no longer face competition. It can be harder for the seller to negotiate on price and other deal terms after signing a binding agreement that precludes them from talking to other potential buyers.
Buyers, on the other hand, are in the strongest position when they have a long period of exclusivity. This gives them time to conduct their due diligence and negotiate favorable terms for the merger or acquisition.
Whether you are in a buyer or seller’s position, it is imperative that you have an experienced mergers and acquisitions attorney on your side. Each component of the letter of intent can have a big impact on the terms of the sale and the future of your business. At Silverberg|Brito, PLLC, we work side-by-side with our clients as their partners and problem solvers to help them achieve the best outcomes for their business. If you have questions about how we can help your Florida business, contact us to schedule a free consultation