A letter of intent (LOI) is a written document that outlines the intentions of the buyer and the seller during a potential transaction. Among other things, the LOI includes the purchase price and payment terms in addition to other key considerations to the transaction. The main purpose of the letter of intent is to ensure there is a preliminary agreement on price and key terms before the parties commit significant resources and legal fees in pursuing an acquisition, and before sellers agree to grant exclusivity to buyers. The LOI is usually non-binding, expresses the buyer’s intentions to purchase the business and sets the stage for a more detailed due diligence process.
At the time of negotiating an LOI, the parties have limited information available and have not yet engaged in formal due diligence, thus the proposed terms for the transaction that are included in the LOI are generally not legally binding on the parties. However, as a practical matter, the LOI sets the expectations of the parties regarding the final terms, and any deviations from such terms after the LOI is signed will require justification. In addition to the non-binding deal terms, a letter of intent often includes some provisions that are expressly stated to be legally binding.
Typically, an LOI consists of the following:
- Price/Consideration: Will it be all cash, all or part stock, earn-out, or debt?
- Transaction structure: Will it be an asset purchase, purchase of all outstanding shares, or a merger?
- Working capital: What is the minimum required working capital and are there any adjustments to the purchase price?
- Transaction fees: What are the closing fees and who assumes what?
- Closing date: Expected timeline for due diligence and negotiating the deal
- Any escrow to secure the seller’s indemnification obligations, how long the escrow will last, and for what items the escrow will be the buyer’s sole remedy for claims
- Exclusivity for the prospective buyer—How long will exclusivity last? When can the seller terminate exclusivity early?
- Access to the employees, books, and records of the seller for the benefit of the buyer as part of its due diligence process
- Scope of key representations and warranties of the seller (will some key reps be subject to qualification by a “materiality” or “knowledge” standard?) and survival period
- Conditions to closing the transaction, both for buyer and seller
- Whether any non-compete/non-solicit agreements will be required
- Indemnification obligations by the selling stockholders and the limits and exclusions from such indemnification provisions