A letter of intent (“LOI”) is one of the first documents used during a transaction process. An LOI is a written expression of the parties’ intent to enter into a transaction and a summary of the material terms of the deal. Negotiating an M&A transaction is time-consuming and can be disruptive to the seller’s management of its daily operations. The development and agreement to an LOI is a productive first step that allows the parties to determine very early in the process whether there is a basic agreement on key terms and confirm that there are no “deal-breaker” issues before either party has devoted substantial time and resources. The LOI helps to facilitate the preparation and negotiation of the definitive documents for the transaction by serving as an outline of the key provisions.
Because of when LOIs are submitted, the seller likely has not engaged in comprehensive due diligence and often has limited information about the business for sale. Therefore, the letter of intent’s proposed transaction terms are generally not legally binding. The LOI does set expectations on both sides of the negotiating table regarding final terms. Any deviations from such terms after the LOI is signed will require justification. Letter of intent typically do include some provisions that are legally binding.
Below is a summary of the different provisions often included in letters of intent. We will cover each of these in more detail in later blog posts.
Non-Binding
Structure
Purchase Price
Indemnification Framework
Key Closing Conditions
Management Arrangements
Due Diligence
Binding Provisions
Exclusivity
Confidentiality
Expenses
Governing Law