Contracts are omnipresent in today’s global business world. Buying? Selling? Leasing? Merging? Acquiring? Loaning? Then you need a contract to protect yourself and your interests. But before both parties reach the contract negotiation stage, there is another, optional step that is sometimes taken – creating a letter of intent (LOI). This document can often be beneficial and provide additional safeguards in a transaction, reinforcing the contract to come. Our partner Kathryn Turpin explains how to craft a strong letter of intent below.
What is a Letter of Intent?
Something that I help my clients with all the time is crafting a solid letter of intent. Knowing how to write a letter of intent might be of particular interest for someone who is looking to buy or sell a business or is thinking about pursuing a new business relationship with another party. First, let’s quickly clarify terminology. The term ‘letter of intent’ is usually interchangeable with terms like ‘memorandum of understanding’ or ‘term sheet.’ These three documents may come in a different format, maybe a letter form or a chart form, but they are all really the same thing and they serve the same purposes.
A letter of intent is most useful when parties are beginning work on a fairly complicated agreement that will take some time to negotiate and finalize. This could include the purchase of a company or making a significant investment in a company and getting management rights in return, or even entering into a strategic cross-marketing or product supply agreement. In these situations, an LOI can serve a couple of important purposes.
First, it creates the framework for more detailed negotiations that will follow. Second, it facilitates those negotiations by setting up or imposing some enforceable or binding rules, such as confidentiality.
What Should My Letter of Intent Include?
So what does a good letter of intent contain? One crucial detail is to specify which provisions are binding and which provisions are non-binding. Binding provisions are terms that will be enforceable against either or both parties, regardless of whether the underlying transaction is completed. As I mentioned above, confidentiality is a very common binding provision in letters of intent. Each party should be confident that if it shares confidential information during negotiations, said information will be maintained as such. Another popular binding term is exclusivity. One or both of the parties may request that the other party stop negotiating or seeking offers from third parties during the negotiations specified under the LOI.
You also want to make sure that expenses are specifically noted in a letter of intent. During the LOI stage, each party typically bears its own expenses, unless unusual circumstances apply. Of course, the final agreement could provide for some reimbursement of expenses by one party to the other, but that is not ordinarily the case in most LOIs. Lastly, a good letter of intent should specify the date by which the letter of intent will terminate if a final agreement has not yet been signed.
Don’t Forget the Non-Binding Provisions
Letters of intent also include non-binding terms – these encompass the business terms that the parties have already tentatively agreed upon so far. This would generally include a general description of assets being sold or purchased, services to be provided, purchase price, payment terms, management rights, and so on. The reason these particular terms – important as they are – should be specified as non-binding is because they may change during negotiations. If the purchase price of a business or asset is classified as binding in a letter of intent, then it would not be able to be debated any further, throwing a possible wrench into the upcoming contract negotiation.
If you are preparing to buy or sell a business or preparing to enter into a different type of complicated transaction with another party, Richards Rodriguez & Skeith’s business and transactional team may be able to help you decide whether a letter of intent would be appropriate for your situation. Contact us today to discuss your options!