What Should You Include In Your Letter of Intent (LOI) When Buying a Business?
The first step of buying a business is the buyer signing a Letter of Intent or “LOI” which shows the seller that the buyer is serious. A LOI is a formal non-binding offer to buy a business from a seller. Even though LOIs are mostly not binding, they are still important to the business purchase because they include the essential terms of the deal. So what should your LOI include?
- Purchase price
- Whether the sale will be an asset sale or a stock sale
- No-shop clause, which prohibits the seller from accepting other offers
- Terms the buyer insists on in order to move the deal forward. A common example is a buyer often requires the seller’s key people to remain in the company to help the transition.
- Buyer’s right to access seller’s documents and financials
- Confidentiality clause
- Non-binding clause, to remove any doubt that the LOI is non-binding
- Timeline or expiration date for the LOI
Be Careful About Adding Too Much to Your LOI
Buyer beware, though! If a buyer puts too many key terms, it may start looking like a purchase agreement. The court considers the following factors to determine if it is binding or not: (1) whether the agreement will be put in writing; (2) the level of detail contained in the letter of intent; (3) whether a formal writing is required to fully express the applicable covenants; and (4) whether the negotiations indicate that a written draft is contemplated at the conclusion of the negotiations. Courts also consider whether the LOI has clauses such as warranty, liquidated or other damages, taxes, and notice provisions. In other words, if your LOI starts to quack like a contract and walk like a contract, the court may consider it a contract. See also See QUAKE CONSTRUCTION v. American Airlines, 181 Ill. App.3d 908 (1st Dist. 1989).
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