letter of intent for business transaction

In addition, once it becomes known that the seller has entered into a Letter of Intent (even if the terms are confidential), if the transaction does not close, the perception may arise that the buyer found something wrong and walked away.

This can be detrimental given that even a 90-120 day lockout means that any other interested parties will most likely move onto other opportunities during this time frame. Your lockout period means that you will be unable to market your business to anyone else. This is a key issue to consider when selling a business. Sellers should grant exclusivity very carefully and should do everything possible to limit the amount of time they’re prevented from speaking to other buyers. An LOI usually includes a lock-up period where the seller is out of the market - that is, unable to speak with other buyers about doing a deal. Secondly, exclusivity is a key consideration. Although some sophisticated buyers often include significant details in their IOI, it is still incumbent upon the seller to get a formal LOI from the buyer. So, don’t confuse the two.Īn IOI is like asking for a date, while an LOI is a marriage proposal. Both documents are part of the process of buying or selling a company however, the LOI lays out more specific terms. But to the novice, what is important in the LOI? Here are some general guidelines.įirst, although they’re similar in many ways, an LOI is different from an indication of interest (IOI). Therefore, getting the Letter of Intent right is vital. It is an important document in the process of selling a business, one that you, as a seller, should require of any and all serious buyers. Based on what each side discovers during due diligence, and/or whether the profits of the company decline, the deal may change.” Letters of Intent: A Framework for Moving ForwardĮssentially the Letter of Intent is a framework for the deal, but what it does most importantly is commit both parties to move forward with the deal exclusively.Īs such, the LOI provides the seller with the confidence that the proposed buyer is serious, and likewise the buyer gains the knowledge that the seller is committed to working on closing the deal (assuming all the following steps in the transaction pan out). Rather, it’s the framework or roadmap for that final deal. However, the LOI isn’t necessarily the final deal. “The LOI is an important step because it lays out the basics of the final deal: the purchase price and terms, closing date, length of exclusivity, approvals, and much, much more. One of the most important documents that many novice business sellers have no experience with is the Letter of Intent (LOI). Indeed, if you want to have a “clean” transaction, one where you, the seller, is protected, documentation that dots the Is and crosses the Ts is critical. Each deal is different and will require that the terms and conditions be adjusted to accommodate that transaction.The critical role that documentation plays in a successful M&A transaction cannot be overemphasized. These are just samples of terms that need to be considered in an LOI. How the parties will resolve any disputes, such as by arbitration, court, or some other mechanism. Grounds for being able to terminate the Letter of Intent. Other conditions to closing (e.g., financing). Non-compete and non-solicitation agreements. The obligations of the parties are to keep all discussions and proprietary business information confidential. Price adjustments – What mechanisms will allow the preliminary agreed-upon price to change, (such as changes in growth or loss in revenue)?Įxclusivity: the buyer should have the exclusive right to purchase the business during a certain period of time, and the transaction should be taken off the market.

Structure: will the purchase be an Asset Purchase Agreement, or possibly a Stock Purchase Agreement?ĭeadline for due diligence (the buyer’s investigation of the financial and legal condition of the company).

Letter of intent for business transaction