Buying and Selling a Business: What you Need to Know About Letters of Intent

The letter of intent (LOI) is a letter agreement which contains the initial offer and key terms of the proposed deal. It is sometimes called an offer letter, term sheet, or memorandum of understanding.

The LOI is generally an expression of interest in the deal, intended to be expanded upon and replaced by a definitive purchase and sale agreement to be prepared after the LOI. The LOI should be clear on whether it is merely a non-binding expression of interest as opposed to a binding contract based on fixed terms. If the LOI is not binding then neither party has any legal liability for withdrawing from the deal prior to a definitive purchase agreement being made; however, if the LOI is considered binding then the parties will be liable for any breach. Most often, the LOI will contain a combination of binding and non-binding provisions.

The non-binding provisions of the LOI will usually address the deal structure(i.e., share purchase or asset purchase), the purchase price and method of payment (e.g., seller financing, instalments, earnouts, etc.), the anticipated closing date, and any key agreements to be delivered in connection with the deal (e.g., non-competition agreements, employment or consulting agreement, option agreements, etc.).

Binding provisions may include exclusivity (requiring the seller to not negotiate with any other prospective buyer for a period of time), confidentiality and non-disclosure (although this may also be addressed in a separate non-disclosure agreement), buyer’s right to conduct due diligence, expenses (usually each party pays its own costs), deposits and break fees, and restrictions on public announcements.

LOIs range from very simple, covering only the most basic deal terms, to very comprehensive, covering items best left to the definitive purchase agreement. While an overly comprehensive LOI may help with the preparation of a definitive purchase agreement, it can significantly extend the negotiation of the LOI. As a general rule, if a certain term is important to one of the parties (i.e., a “deal killer”) it should be included in the LOI to give the parties a chance to address it very early in the deal process.