Letter of Intent

Letters of Intent can be very useful in establishing whether the parties to a potential deal are sufficiently close enough together on basic deal terms to proceed with the next steps. That’s important because the next steps include the often time-consuming and expensive tasks of due diligence, financing arrangements and final deal negotiations.

At the outset of discussions regarding a potential sale of certain assets or of an entire business, would-be sellers often provide only limited financial and other information to would-be buyers. Sellers limit the initial information in an effort to balance the seller’s need to protect confidential information regarding their business with the buyer’s need to know what they are buying.

For a buyer who shows serious interest based on the seller’s disclosed preliminary information, the Letter of Intent can be an excellent way of mapping the way forward. The Letter of Intent can clarify buyer and seller expectations regarding preliminary basic deal terms and the timetables for the next steps. However, a crucial aspect of the Letter of Intent is an understanding of which parts of the Letter of Intent are binding and which are non-binding.

Drafting mistakes regarding binding and non-binding provisions can have negative, unintended consequences for the parties. The Letter should state explicitly that the Letter of Intent is non-binding (with certain provisions excepted as labeled). Further, the Letter should state that the final deal terms – if there is a final, binding agreement – will be stated in an official yet-to-be-negotiated written agreement between the parties. Logically, the potential buyer doesn’t know enough about what the seller is selling until the buyer has a chance to investigate what’s being offered for sale through a process called due diligence.

The Letter of Intent should also clearly describe whether the proposed transaction involves the sale of an entire business or is limited to certain assets and liabilities.

The Letter of Intent should also clearly identify who would be the buyer and who would be the seller. If the seller is a closely held business and substantially all of seller’s assets are being sold, the shareholders of the company should be included as members of the selling party.

The buyer will want as a binding term an “exclusivity” clause which says that, for a certain specified period, only the would-be buyer has the right to purchase the assets or business for sale. This gives the buyer some protection, given that the buyer will be spending time and money on the due diligence process. The buyer will also want unlimited access to the seller’s contracts, accounting books and other information.

The Letter of Intent also typically contains preliminary, non-binding deal terms such as the purchase price, how and when the purchase price will be paid, and whether the buyer expects non-competition and/or consulting agreements from seller as conditions of the deal.  Other
contingencies, such as the successful assignment of a commercial lease on the building where the business’ operations occur, may also be noted in the Letter of Intent.

Letters of Intent vary in length and detail, but they should not be drafted hastily or without the aid of an attorney.  The goal with a Letter of Intent is to save time, money and heartache for both buyer and seller. Think of a Letter of Intent this way: If the parties can’t reach agreement on a Letter of Intent, then they are not likely to reach agreement on the potential transaction either.

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Disclaimer: This Blog is for informational purposes only and is not to be construed as legal advice. If you have questions, please seek the advice of an attorney.  An attorney-client relationship is not formed by reading this Blog. If you are interested in Wittenburg Law’s representation of you, you must contact Wittenburg Law for a determination of whether your matter is one for which Wittenburg Law is willing and able to accept representation of you.

 Bonnie Wittenburg, Wittenburg Law Office, PLLC, 601 Carlson Parkway, Suite 1050, Minnetonka, MN 55305   952-649-9771  www.bwittenburglaw.com    bonnie@bwittenburglaw.com