Letter of Intent

A good Letter of Intent should include all high level terms so that preparing the final documentation is simple. Here's a quick overview of what we usually like to see in an LOI:

• Parties: This provision should identify the proper legal entities making the sale and purchase (and list guarantors, if any).

• Transaction Structure: A major part of any LOI is agreeing to an equity sale or asset purchase.

• Purchase Price: One of the biggest reasons to negotiate an LOI carefully is because not only is the purchase price set, but often key terms like earn-outs or working capital adjustments are agreed here. (We can help with all of those.)

• Key Tax Elections: Agreeing to a 338 election, for example, or the right purchase price allocations are important points that may be applicable and are not to overlook in an LOI.

• Financing Arrangements: If the sale is seller financed or contingent on bank financing, the LOI should set out such terms.

• Clear Non-Binding Provision: A very important point of an LOI is usually that it is be binding only as to confidentiality and exclusivity. All other points guide the transaction, but are specifically non-binding.

• Clear Termination Provision: Because an LOI is non-binding as to most terms, the termination provision really governs how long exclusivity lasts. It should be carefully negotiated because there are different incentives depending on whether you are the buyer or the seller. 

• List of Ancillary Agreements: An LOI should list out all anticipated ancillary agreements (such as an earnest agreement, a promissory note, an employment agreement, etc.) and assign initial drafting responsibilities.

• Diligence Matters: Typically an LOI will have an agreement on the manner and scope of further diligence to be performed.

• Short Description of Reps and Warranties: While the substance of reps and warranties are left to what is usually called the "definitive documents" (or the actual purchase and sale agreement), an LOI is a good time to set out any key unusual reps you know may be included, as well as to generally state that otherwise the parties both expect "customary representations."

• Key Indemnification: An LOI will usually simply refer to customary indemnification provisions, but an LOI is a great chance to win key battles such as getting line-item indemnification for certain risks or setting a cap or basket.

• List of any Covenants: If there are any post-closing covenants (such as an agreed press release or a non-compete period) those are useful to clarify at the LOI stage.

• Exclusivity: This can be a controversial term, but is often one of the main reasons a buyer will want to move to an LOI, that is to get the seller under exclusivity. Contact us for more info here.

• Confidentiality: An LOI should generally either be subject to a prior confidentiality agreement between the parties (our process on that here) or have a short confidentiality term in the LOI.

• Expenses: Most LOIs will clarify that each party will bear its own expenses. (Occasionally the LOI may also require re-payment of legal fees if a party backs out.)

​​

If that sounds like a lot, well it is. But a good form LOI will contain all of this structure, and thus serves as a great way for an attorney to walk a client through the key transaction points that they might not even know they should be asking for. Start here.