Navigating business transactions like buying or selling a business, or initiating a new partnership, often begins with an essential step: drafting a Letter of Intent (LOI).
In this blog, Kathryn Turpin, a seasoned corporate and transactional attorney walks you through the specifics of LOIs and when you would need to consider one.
What is a Letter of Intent?
A Letter of Intent, also known as a Memorandum of Understanding or a Term Sheet, varies in its format but serves a unified purpose. It is instrumental when initiating complex agreements that require detailed negotiations. These can range from company acquisitions and significant investments to strategic agreements like cross-marketing or product supply.
The Dual Purpose of an LOI
- Framework for Negotiations: An LOI sets the stage for detailed discussions, providing a foundation for what’s to come.
- Binding Rules Establishment: It also introduces enforceable elements like confidentiality, ensuring that shared information during negotiations remains protected.
The Binding and Non-Binding Elements
- Binding Terms: These include confidentiality, exclusivity (preventing negotiations with third parties), and expense responsibility (each party covers its own during the LOI stage). Additionally, the LOI should outline termination conditions, specifying when it expires if a final agreement isn’t reached.
- Non-Binding Terms: These encompass the preliminary business terms agreed upon, like asset descriptions, services, pricing, and management rights. These are non-binding because they’re subject to change as negotiations progress.
When is an LOI Needed?
If you are contemplating buying, selling a business, or entering into a complex transaction, an LOI can be a strategic first step. It organizes the process and sets clear expectations for both parties.
Need Help Determining if You Need a LOI?
Remember, while the journey of business transactions can be intricate, a well-crafted Letter of Intent is a powerful tool that lays the groundwork for successful deals and partnerships.
If you need additional information on this topic or assistance with preparing or interpreting a letter of intent, contact us today.
