What is a Letter of Intent (LOI)?
From Your Multimillion-Dollar Exit, by Wayne Zell
What is a Letter of Intent (LOI)?
When someone wants to purchase your business, they will provide you with a Letter of Intent (LOI) that gives information about what they will offer and what they want to purchase.
Are all Letters of Intent (LOI)s the same?
I have seen hundreds of Letters of Intent (LOIs), from bare-bones versions to extremely detailed and comprehensive LOIs. A more detailed LOI (Letter of Intent) may serve you best, simply because it makes negotiating the final sale (purchase) agreement and ancillary agreements easier.
What is included in a Letter of Intent (LOI)?
A detailed LOI looks something like the example found on my website at www.waynezell.com/resources, but it typically contains the following components:
- Nonbinding Provisions- Purchase Price and Terms of Payment. A well-drafted LOI should include the total purchase price to be paid for your business and how that price will be paid.
- Structure- Your LOI should clearly state how the buyer intends to structure the purchase of your business. This may directly impact your tax treatment on the transaction.
- Due Diligence- The LOI should include a section describing the buyer’s plan for conducting a due diligence investigation of your business and the time frame to complete its investigation.
- Purchase Agreement- The LOI will reference the purchase agreement, which will contain representations, warranties, covenants, agreements, conditions, indemnities, setoffs, and escrows normally associated with transactions like yours.
- Exclusivity Period. If the buyer expects to spend substantial time, effort, and expense in conducting due diligence, it will want to bind you to a provision that prevents you or any of your key employees from entering into or conducting discussions with other prospective buyers for a specified period of time after the LOI is signed. This is known as an exclusivity provision. The buyer will want at least 90 days, but you will want to negotiate a shorter period (e.g., 45 days) simply to avoid the due diligence process from diverting your attention from your business. Because it is binding, this provision allows the prospective buyer to sue you for damages if you violate the agreement and if you solicit competing offers from others after signing the LOI.
- Confidentiality and Non solicitation. If you were unable to include strong nondisclosure and non solicitation language in your NDA with the prospective buyer, you should try to get them added as part of the LOI’s binding provisions. The nondisclosure obligation will prevent either you or the buyer from disclosing the existence or contents of the LOI or any other confidential information exchanged to anyone other than your representatives in the transaction. The LOI should also prohibit either party from soliciting, hiring, or otherwise interfering with the employees or customers of the other party.
What happens when you sign a Letter of Intent (LOI)?
Once you sign an LOI, you are effectively “engaged” to your prospective buyer for a limited period. Just like any engagement, you should be able to break it off at any time. However, if due diligence goes well, you may end up signing a definitive purchase agreement with your buyer.
To read more about Letters of Intent and a variety of other subjects, you can purchase Your Multimillion-Dollar Exit here.