A Letter of Intent (“LOI”) is often used by attorneys and brokers to establish the framework for a transaction. Typically, key terms are memorialized in a non-binding LOI in order to allow the parties to move forward toward drafting legal documents to consummate a deal.
What basic terms should be in an LOI?
1. Identify what is being bought/sold
If the transaction involves the sale of assets, then the included assets should be listed (equipment, intellectual property, files, fixtures, trade names, etc.). If the deal involves a piece of real estate, then the property should be identified as specifically as possible. There should be no ambiguity as to what is being sold.
2. Purchase Price
The total purchase price should be stated, along with the manner in which the purchase price is going to be paid. For example, if Buyer is required to pay a deposit, the amount of the deposit, when it is due and who will hold it in escrow should be included. Also, if Seller is financing a portion of the purchase price with a promissory note, the basic terms of the note should be set forth.
3. Contingencies
The LOI should specify any contingencies that need to be satisfied in order for the transaction to close; for example, a specific time period during which Buyer can conduct certain due diligence and the scope of such due diligence (such as physical inspection of assets or real property, verification of contracts/licenses, verification of financial statements, etc). Any financing contingencies should also be agreed upon in the LOI.
4. Closing Date/Location/Method
The LOI should set forth the date the transaction is expected to close, the location where the closing will be held and the method of closing (i.e. closing in person vs. exchange of documents electronically).
5. Covenants
The terms of any negotiated covenants-such as Seller’s covenant not to compete should be specified.
6. Binding/Non-Binding
While many Letters of Intent state that they are non-binding, certain provisions of the LOI may be carved out as binding upon the parties; specifically, there may be confidentiality provisions and “no-shop” provisions that remain binding upon the parties, although the remainder of the LOI is not binding. The parties should carefully review the LOI in order to understand what is and is not binding.
Summary
I find in my practice that often times, clients will not present me with an LOI until after it is signed. Their thinking is that they don’t need to get me involved until after the LOI is signed and an apparent deal is seemingly in the works.
I always think it’s a good idea to have an attorney review the LOI before it is signed. As indicated above, there are certain provisions of the LOI that may impose binding obligations upon the parties. All sides need to have a thorough understanding of what they are signing, even at this early stage of the transaction.
Keep in mind that an LOI may contain many more terms and/or detail than what I have set forth above depending on the deal’s complexity…but, hopefully this gives you some helpful insight for your next deal.
