A letter of intent (“LOI”) is often entered into among parties to the sale of a business prior to negotiating and executing a Purchase Agreement. Among other things, LOIs can be used to initially establish key deal points, while assuring that both parties are interested in the transaction through the inclusion of a “no-shopping” period. LOIs can also be used to identify due diligence priorities going forward.

An LOI, depending on the size of the transaction, may include such matters as:

  • A description of the transaction, including whether it is a stock/LLC interest or asset purchase, the identities of the parties and the applicable timetable for due diligence, closing date and related matters;
  • The purchase price, including any formula for determining price, any price adjustment considerations or mechanisms, down payment, deferred payment terms including security, financing and issues related to deposits, such as the amount of any deposit and any conditions applicable to the refund of a deposit;
  • Any representations and warranties that are key to the transaction;
  • Important key indemnification issues because it is better to determine prior to conducting due diligence whether any indemnification issues are deal-breakers;
  • Any significant conditions to closing, such as obtaining or transferring licenses or permits, financing, employment/consulting agreements, the drafting of a definitive agreement;
  • Ancillary agreements to the sale transaction such as promissory note, security agreement, employment/consulting agreements, non-competition agreements, real estate lease assignment;
  • A “no-shop” provision prohibiting the seller from continuing to market the business for sale;
  • Confidentiality provisions;
  • A “drop-dead” date for negotiating a definitive purchase agreement;
  • The extent to which the LOI is binding and any remedies for breaching the LOI.

While LOIs are fairly common, they are not used in all transactions. The relationship of the parties, size of the deal, time limitations to affect a closing and additional costs involved may influence whether or not a LOI is appropriate.

Patrick J. Van Zanen
pvanzanen@mclawfirm.com
480-994-2000

Disclaimer: This blog is for information purposes only. Legal advice is provided only through a formal, written attorney/client agreement.