Over the years, I have seen many business purchase/sale transactions. This blog will focus on one question that has always intrigued me. When the initial document presented by a prospective buyer to a prospective seller for consideration is a document often called a letter of intent (LOI), is it better dealing from a long-form or short-form letter of intent? I have come to observe over time that in representing the prospective buyer, I tend to lean more to a shorter-form of LOI. And when representing a seller, I tend to lean in the opposite direction and prefer a longer-form document.
A short-form LOI will generally cover fewer matters, but core matters such as purchase price, payment of purchase price and post-closing employment or consulting, and a few other matters. And those provisions are commonly the first thing many sellers want to see. I can’t count the number of times I’ve heard “the rest is all boilerplate.” Buyers also tend to like the short-form LOI as it leaves buyers with plenty of opportunity later when the purchase agreement is presented to offer self-serving interpretation of what was meant by certain language, take positions in the purchase documents that the seller had not really contemplated or discussed and avoid dealing with thorny issues that can be contentious later when the purchase agreement and related sale-related documents are presented for negotiation. Such items as representations and warranties, covenants, indemnification parameters, purchase price holdbacks and offsets, adequate security for any deferred portion of the purchase price, due diligence scope and access to seller’s employees and customers are just some of the important issues that can make or break a deal. A long-form LOI will deal with more of those points mentioned above with a view to determining if any issues exist that may be an impediment to closing the deal. To some, it makes a great deal of sense to figure out those thorny issues earlier rather than later.
My experience has been that short-form LOIs are less expensive to negotiate and prepare at the front end. But the process of resolving the thorny issues that inevitably pop up in the purchase documents can be much more expensive in the long run and can also create lost opportunities for a seller with other potential buyers.
I recently was involved in a situation with a client who had two back-to-back potential sale transactions. The first one involved a shorter form LOI that was prepared by the buyer and signed before we became involved, followed by delivery of purchase documents that inserted matters not discussed or properly explained to the seller in the LOI phase and that proved to be a significant and non-resolvable issue to the satisfaction of the seller, but left our client with significant legal fees. The second transaction involved a “quasi” LOI presented to the seller that we converted to a long-form LOI. While the cost of attempting to produce a long-form LOI was not inexpensive, it was about 40% less expensive than the legal fees in the first scenario and took less time to realize that there were going to be irreconcilable differences bringing the proposed sale transaction to an end.
But, as is usual, there is often no perfect way to proceed as each situation involves a number of factors, including personalities of the parties, that are not always possible to predict at the start of the purchase/sale transaction process.
Michael W. Margrave
Disclaimer: This blog is for information purposes only. Legal advice is provided only through a formal, written attorney/client agreement.