The Letter of Intent (“LOI”) is a pre-contractual document that outlines the key aspects of a potential deal. The parties of a deal use the letter of intent to iron out some of the areas that will be heavily negotiated in future binding definitive agreements. For this reason, it is important to focus on the five items listed below:
- Binding and Non-Binding Clauses
- Financial Terms of the Deal
- Structure of the Deal
- Post Sale Handcuffs
- Due Diligence Expectations
Binding and Non-Binding Clauses
A primary risk in signing a LOI is the potential for provisions to be binding on the parties of a deal. While the obligation to consummate the deal and the material deal terms in a LOI are non-binding, provisions that address confidentiality, exclusivity, governing law, and dispute resolutions can be treated as legally binding commitments.
Financial Terms of the Deal
When drafting a LOI, the conversations establishing financial terms is critical to a successful deal. Specifically, the main consideration regarding the financial terms is the purchase price. The purchase price is sometimes added as a dollar amount and other times a formula or method to determine purchase price is established. Other financial provisions that are important to add or review in a LOI are those addressing: escrow or seller’s holdback, how a buyer will finance the acquisition, and earnout pricing considerations. The financial terms are always subject to adjustments, but it remains a foundational piece to moving forward in a deal.
Structure of the Deal
An asset acquisition or a stock purchase are types of deal structures. An asset acquisition is preferred when the buyer is less risk averse. The stock purchase or equity purchase will typically expose the buyer to more liability exposure. It is important for the parties to determine at the LOI stage what is best for them when assessing the nature of the business, business operations pre and post-closing, tax implications, and liability exposure.
Post Sale Handcuffs
A buyer wants to ensure that their purchase is not only successful at the time of acquisition, but that the company is successful post closing. This is why terms establishing that the seller will not compete or otherwise interfere are critical at the LOI stage. The buyer and seller can also establish at the LOI stage what employees, if any, will remain with the company post-closing. There is a lot of negotiation power in these terms, so it is important that the parties are on the same page regarding these concerns prior to definitive agreements being drafted.
Due Diligence Expectations
The LOI will typically outline how due diligence will occur and provide the general rules for the process. Due diligence is essentially a financial and legal check on the parties involved in the deal. For these reasons, it can shake things up that were agreed to during the LOI stage.
 ByrdAdatto, PLLC, Mergers & Acquisitions Field Guide, October. 13, 2022, at Chapter 1,
Madison White is an attorney Byrd Adatto. She can be reached at email@example.com.
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