Letters of Intent & What You Should Know
May 2, 2022
A letter of intent (LOI), also commonly referred to as a term sheet, is generally used when one party wants to enter into a business deal with another party. An LOI can be applied to a purchase agreement for a small business, a merger and acquisition (M&A), a joint venture, government grants, or even a college athlete’s commitment to attend a certain university.
As with any contract, there is generally a mutual agreement and consideration on both parties’ behalf. In other words, this business contract can occur if Company A wants to merge and acquire Company B, it will offer something in return for the acquisition, usually cash or stock certificates, or even assumption of debt.
Letters of intent are serious legal instruments, and as such, should be drawn up and drafted by attorneys experienced in the matter. Both sides in the proposed agreement may actually present different versions of an LOI, which then have to be hashed out in negotiations.
If you’re looking toward purchasing a business, merging or acquiring a business, entering into a joint venture, or are otherwise in need of a letter of intent in or around Overland Park, Kansas, or Kansas City, Missouri, contact the Coppaken Law Firm. Our business law attorneys work diligently so you can reach your goals.
We have 15-years-plus experience in helping businesses from closely-held family entities to Fortune 500 companies, and our business law attorneys can help you draft a letter of intent for whatever purpose you seek.
What Are Letters of Intent Used For?
From our brief introduction above, you can see that letters of intent serve a variety of purposes, but basically, they take preliminary business discussions to the next and more serious level. They place a set of expectations on both parties eyeing a deal of any sort, whether a sale, purchase, merger, joint venture, or other collaboration.
If you watch or listen to sports talk shows, you’ll often hear that this high school football player just signed a letter of intent with such-and-such university, but you may also hear that another high schooler just rescinded his letter of intent.
Letters of intent are generally just that – an announcement to move forward, and even in the business world, they are generally not binding except for nondisclosure provisions and “no shop” clauses that, for instance, prevent a business seller from accepting other offers while the LOI is in effect.
Elements of a Letter of Intent
A letter of intent should forecast what a final agreement should look like and at the same time contain certain time-honored legal elements that protect both parties going forward. In other words, the parties involved should be serious about what they’re planning to agree to. Thus, a letter of intent will generally include the following parts, among others:
DESCRIPTION OF THE TRANSACTION: This gives an overview of the transaction and signals both parties’ expectations.
CONSIDERATION AND PURCHASE PRICE: Each party must receive something of value. If one party is purchasing the other entity’s business, the price and consideration must be included. Consideration is usually money or other assets to fulfill the asking price. For college athletes, the consideration is usually a scholarship.
PROHIBITED ACTIONS: In a purchase or acquisition, the purchasing or acquiring party will require that the target entity not change its business practices. This section might prohibit, for instance, major capital expenditures outside the normal course of business, a shakeup in senior management, a change in ownership, unexpected shareholder distributions, or the filing of bankruptcy.
TIMING AND CLOSING DATE: This discusses how long the LOI is expected to remain and when the closing will take place.
CONDITIONS FOR CLOSING: The letter of intent will normally list conditions that must be met before the closing can take place, including:
Required approvals from each of the entity’s owners, directors, or managers
The completion of due diligence by both parties
Receipt of all regulatory approvals
Other conditions mutually agreed upon
NO SHOP PROVISION: This means that both parties will not solicit or negotiate other offers with third parties during the LOI time frame.
EXPENSES: Generally, this section will state that each party is responsible for its own expenses.
PUBLIC ANNOUNCEMENTS: The LOI should state how and when any public announcements of the deal are to be made.
BROKERS, AGENTS, OR FINDERS CLAUSE: The LOI should also state that neither party has utilized any brokers, agents, or finders in seeking out the transaction so that neither side is suddenly confronted with claims for unpaid commissions.
CONFIDENTIALITY: Both parties should agree that negotiations and documents and information exchanged between them should remain confidential.
DUE DILIGENCE: This is a good faith provision that both parties will cooperate with each other in the matter of due diligence and cooperate in the process of exchanging documents and information.
Are Letters of Intent Legally Binding?
Letters of intent are generally just that – an expression of intent to complete a transaction, and so they are generally not binding. If one of the conditions for closing is violated, for instance, the acquiring entity can justifiably back out. Other matters may come to light during the stated time frame for the LOI that may compel either party to back out. To be safe, however, it is a good practice to include a non-binding statement in the LOI.
On the other hand, without a letter of intent, either side can seek alternative transactions or even steal proprietary information from the other party with no provision to stop them from doing so.
Legal Advocacy You Can Trust
A letter of intent provides a shield for both parties, as well as a roadmap forward, and thus is an important instrument in many business transactions. An LOI also facilitates the negotiating process toward closing the deal in question. Getting great service is important for your goals, so you need a hardworking and knowledgeable business law attorney to support you.
For all your business law needs in or around Overland Park, Kansas, or Kansas City, Missouri, rely on the Coppaken Law Firm. You will receive personalized service and creative solutions for all your goals and needs. We also proudly serve clients throughout Johnson County and Jackson County.