A letter of intent (LOI) is a formal, but not necessarily binding, statement from the party that wants to buy a business to the party that wants to sell that business. Sometimes referred to as a Memorandum of Understanding, the letter of intent starts the negotiation process that, if successful, ends with the purchase of the business.
Whether you are buying or selling the business, the letter of intent is a crucial document. If crafted poorly, you can lose a considerable amount of money, waive some of your legal rights, and expose yourself to significant legal liability.
The Role of the Letter of Intent in the Sale of a Business
The letter of intent is basically an agreement to agree. It lays out each party's expectations for the upcoming negotiation process and provides a structure for that process. The potential buyer will send the letter to the party with the business, often after signing a non-disclosure agreement that keeps the subsequent discussion private. The selling party may then negotiate the terms of the letter of intent before proceeding.
What Should Be Included?
Because the buyer is the party that drafts the letter of intent, the initial version will lay out the terms and conditions for the negotiation and sale of the business in ways that benefit the buyer. The letter will generally stipulate:
- The proposed sale price
- The targeted sale date
- The precise assets included in the sale, including any intellectual property or trademarks owned by the business
- What liabilities the buyer would assume
- How the commercial lease would transfer
- Details about the purchase deposit, including how much it will be and whether it is refundable
- What information the seller will have to disclose in order for the purchaser to do their due diligence
- Whether the seller can entertain other purchase offers while the negotiation is proceeding
- How long the negotiation will proceed
- Who will cover the expenses of the closing
In many cases, the initial letter of intent puts an enormous amount of responsibility on the seller, forcing them to negotiate a better agreement for moving forward. It is not uncommon for the letter of intent to be revised several times before the parties strike an agreement, or even for an aggressive letter of intent from an uncompromising buyer to kill the prospects for a deal.
Is it Binding?
The letter of intent may or may not be a legally binding contract, depending on its terms. To add to the confusion, the terms in the letter are often modified or changed, sometimes in writing but more often based on the subsequent conduct of the parties.
Even if it is binding and the other party is violating one of its terms, it may still not be in your interests to pursue a breach of contract claim, as that would likely end the purchase negotiation.
Small Business Lawyers at the Katz Law Group
The letter of intent sets the terms of engagement for the upcoming negotiation. If you are not careful during this step in the process, you could make mistakes that drastically hurt your interests.
Call the small business lawyers at the Katz Law Group at (508) 480-8202 or contact them online for guidance in central Massachusetts.
