The Letter of Intent, or LOI, as it is commonly called, is an important tool that can used to structure the terms of a deal and make for a smoother transaction. Whether you’re looking to buy or sell a business, an LOI will help make the terms of a deal more clear and define expectations for both sides.
Before we look at the benefits of signing an LOI, let’s first talk about what exactly an LOI is. It is a written and signed document which outlines major deal points, terms and often includes a confidentiality agreement. This document will set the stage and helps define major deal points and interests of the parties involved. While an LOI is not a required document, it is a legal document and specific parts of, like a confidentiality agreement, are enforceable. Accordingly, it is a good idea to have your lawyer and CPA review the LOI. As an experienced business broker, I can help you to draft a strong Letter of Intent.
You may decide not to implement an LOI if both parties are amenable to the major deal points and are confident in proceeding with the transaction. However, if this is not the case, the LOI is a good first step to begin pursuing the deal without having to dive into complex transaction documents. This is also good for working out any potential deal breakers early in the deal.
A solid LOI is designed to be beneficial to both sides of the transaction by defining a framework for the business transaction. This framework can include due diligence procedures, defining how and what will be shared by the seller. There are often clauses to protect both buyer and seller including “no shop” – to prevent one or both sides of the deal from approaching a third party during a given period – and breakup fees if a buyer cancels the transaction. LOl’s also can include provisions for delaying closing, or other details to define the overall time line and expectations for the course of the transaction.
With all the major deal points and overall timeframe worked out, you can confidently move into the official transaction documents without any potential delays or kinks to work out. I can consult with you to determine whether or not an LOI is a good fit for your deal.