The Importance of an Effective Letter of Intent

Contract (2)When you make the decision to sell your business, it is important to take each step of the deal process seriously. It is easy to focus on the finish line, but this can get you into trouble if certain terms and conditions are not properly negotiated before closing the deal. One very critical part of any sale is the letters of intent (LOI), also commonly referred to as “term sheets.”

Both the seller and the buyer should retain experienced legal counsel to assist them at the LOI stage of the process. Below are a few tips to consider when negotiating the LOI:

  • The LOI stage is typically where the seller has the most negotiating power, so you should take advantage of it. Create a list of items that must be agreed upon for the sale to close. Failure to include important terms and conditions in the LOI often results in the buyer (especially a sophisticated one) refusing to agree to them because they weren’t previously part of the agreement as set forth in the LOI. Additionally, a buyer knows that once you have signed the LOI, you are committed mentally to the sale and less likely to take a hard stance or risk losing the transaction. Thus, consider increasing the scope of LOI to include practical, business and legal points.
  • It is imperative that you are clear as to what portions of the LOI or term sheet are binding and which are not. Most people consider LOIs to be non-binding, but certain provisions such as confidentiality agreements, exclusivity in dealing, and other similar matters should be binding.
  • The LOI is the first stage of negotiations, so both parties will be sizing each other up. It is important to give the proper impression. If you are too relaxed with the LOI and sign it too quickly, the buyer may view you as being too anxious or desperate. Do not rush into the LOI with the view that it can be changed later. This can only lead to problems, in addition to giving the buyer unfounded confidence in its negotiating power.
  • Despite what was discussed in the above three tips, it is also important to realize that you do not have to negotiate the entire deal in the LOI. Find a reasonable balance between covering the most significant deal points and leaving the rest for later.

If you are a seller of buyer of a business, let us help you with every step of the transaction. Contact the attorneys at The Swenson Law Firmto schedule your appointment.

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