Advantages Of Entering Into A Letter Of Intent

The Letter of Intent (LOI) is a contract preceding and enhancing the negotiation phase of a business transaction.  It has a number of advantages to each side of the party as set forth below:

I.  MAIN ADVANTAGES

1.  Meeting of Minds. Identify early in the negotiation process issues that can be "deal breakers" before substantial expenses incurred with due diligence and drafting definitive agreement.  You will save yourself a lot of time, expense, and headache if you can resolve the major points at the outset of the transaction.

2.  Facilitate Negotiation Process.  Resolution of principal terms of a transaction at an early stage can enhance deal stability and make negotiation of definitive agreement more focused and straightforward.

3.  Timing and Expenses.  The LOI can also establish the time frame for the proposed deal and memorialize the parties’ agreements regarding payment and allocation of expenses for the transaction.

4.  Leverage.  Each party should strive for a document that will maximize its leverage in future negotiations regarding the terms of the transaction.

II.  Buyer’s Perspective

1.  No Shop. Buyer's principal interest is to commit seller to not negotiate with others for a specified time.

 

 

2.  Due Diligence.  Buyer will also want the letter of intent to include provisions that facilitate buyer’s due diligence investigation of seller and ensure seller cooperation with investigation.

3.  General Terms.  Other than above two provisions, buyer is best served by having the remaining provisions of the LOI be nonspecific.

4.  General language allows buyer to defer negotiation of more difficult issues unit it has gained more knowledge about the target. 

5.  Buyer will also likely have substantially improved negotiation position by this time.

III.  Seller's Perspective

1.  Leverage.  As a general proposition, seller's bargaining leverage is greatest immediately before it signs the LOI and declines continuously thereafter.

2.  Specificity.  It follows that it's in seller's best interest that the LOI be as specific as possible with respect to material terms of the transaction such as:  purchase price, structure, reps and warranties, indemnification, employment agreements, non-competition covenants and other special arrangements.

3.  Confidentiality.  Seller will want the LOI to include a strong confidentiality provision (about proposed transaction and its business), which will be enforceable.

4.  Non-solicitation.  Seller also may want to prevent buyer from soliciting or hiring any of its employees for a period of time if transaction is not consummated.

Next time we will discuss the advantages and disadvantages of using a binding versus a non-binding LOI.

About The Author:  Afshin Hakim has been practicing law over 15 years and has both litigation and corporate law experience.  His practice involves advising clients on a broad range of corporate matters, including company formation, stock incentive plans, executive employment agreements, licensing agreements, joint venture agreements, and various commercial and business contracts.  He also works on venture capital and angel financing, mergers and acquisitions, private equity and debt securities offerings, public offerings, federal and state securities law reporting requirements, intellectual property, as well as employment and real estate transactions. Mr. Hakim can reached at 213-223-1805.

Posted on January 5, 2012  |   Email This Blog Post   |   Print This Blog Post   |  All Contributions From Afshin Hakim