WHY YOU NEED AN ATTORNEY TO NEGOTIATE YOUR LETTER OF INTENT
Tough negotiations are a vital part of buying or selling a business. All involved parties will do whatever they can to protect their interests in the deal, and all parties are responsible for taking the necessary steps to protect themselves throughout the purchase and sale process. If you are entering negotiations to buy or sell a business and are approaching the phase in which you need to draft the terms for an actual letter of intent, it is critical that you consult with a corporate lawyer before you take the next step.
LETTER OF INTENT
Regardless of whether you are selling or buying a business, a letter of intent can help protect you through the M&A process in several ways. First, it will identify early in the negotiation process issues that can be “deal breakers” before substantial expenses are incurred. Second, it can help facilitate the negotiation process; resolving the principal terms of a transaction at an early stage can enhance deal stability and make negotiation of the definitive agreement more focused and straightforward. Third, an LOI can also establish the time frame for the proposed deal and memorialize the parties’ agreements regarding payment and allocation of expenses for the transaction.
By entering a letter of intent, a buyer’s principal interest is to stop the seller from negotiating with others for a specified time. The buyer will also want the LOI to include time for them to do their due diligence in investigating the business. The buyer should have the remaining provisions of the LOI be nonspecific. This is because, general language allows the buyer to defer negotiation of more difficult issues. This also allows the buyer time to gain more knowledge about the business and may substantially improve their negotiation position.
As a rule, the seller’s bargaining leverage is at its greatest before a LOI is signed. The Sellers bargaining leverage continuously declines after the LOI is signed. It is in the seller’s best interest to make sure the LOI is as specific as possible, with little to no nonspecific previsions. Some of the things you want to make sure are as specific as possible are the purchase price, structure, representations and warranties, indemnification, employment agreements, non-competition covenants, and earn-outs to name only a few. The seller should have the LOI include a strong confidentiality provision (about the proposed transaction and its business), and how it will be enforced. The seller may also want to put a provision in the LOI that would prevent the buyer from soliciting or hiring any of the sellers’ employees for a specified period of time if purchase does not happen.
BINDING VS. NON-BINDING
The letter of intent is typically not a binding contract, but it should establish that certain of its provisions such as confidentiality and exclusivity are to be binding. Parties often fail to do this and as a result there have been numerous reported cases of litigation involving LOI’s. To reduce the risk of litigation, the single most important provision of the LOI is to disclaim contractual effect as to all but specifically preserved terms, a key one being the disclaimer itself.
Peter P. Lindley, P.A. is a law firm practicing in the general corporate, real estate, and commercial law practice areas. The firm also consults with clients in their estate succession and planning matters. We engage in a wide range of legal services having nearly three decades of combined professional experience in accounting and finance, and business and commercial law.
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