February 5, 2021

Letters of Intent – The First Building Block

by Timothy E. Miller, Esq., Isaac Wiles & Burkholder LLC

The M&A (mergers and acquisitions) market is hot right now, despite the number of businesses that are struggling because of COVID-19. Many companies have money and they are looking for deals. If you are a buyer or a seller, there are a number of factors that need to be considered before making an offer to buy or sell.

The Letter of Intent is a simple document that outlines the principal terms of the transaction. A Letter of Intent, or more commonly known as a LOI, is not a binding agreement, but it is an opportunity for the buyer and seller to hammer out and negotiate the principal terms that will be incorporated into the final documentation. It is always wise to have the buyer and seller negotiate these terms without an attorney involved, and then bring the attorney(s) in to draft the documents. There is an old adage, which is more often true than not, and that is attorneys will often “kill the deal” because they get down into the weeds and over negotiate, thereby killing the deal before it even materializes. You can have your attorney in the background advising you on the key terms, but try to keep them out of the initial negotiations.

The key terms that need to be in a LOI include: the purchase price; the terms of payment; whether it is going to be a stock sale or an asset sale; whether there will be restrictive covenants (non-competes and non-solicitations); whether the purchase price, if paid over time, will be secured and how; what assets and liabilities are excluded from the transaction; whether a consulting agreement is necessary to assist the buyer in the transition of the business; indemnification provisions; requirements that the business will operate in a normal fashion during the pre-closing period and a date for the closing. The more terms that are agreed upon in the beginning of the process and are incorporated into the LOI, the better chance you will have closing the transaction and keeping your attorneys’ fees and expenses at a minimum.


Miller
It is always wise to have the buyer and seller negotiate these terms without an attorney involved, and then bring the attorney(s) in to draft the documents.