What is an M&A Letter of Intent?

By Joshua Logan, Esq.

After the identification of a target business to purchase, or of an interested potential buyer, the Letter of Intent, or “LOI,” sets out the most broad, intended terms of the transaction. Usually these terms of the LOI are:

Asset Sale vs. Interest Sale - Determine whether the sale and purchase will be of the assets and goodwill of the company, or for the interest in the company (i.e. shares, membership interest or partnership interest, including which classifications of interest if applicable).

What to do with the Seller's Contracts - Identify which contracts of the seller are to be assigned to the buyer from the seller, which may be retained by the seller and which ones are not assignable and have to either be satisfied one way or another, or if the transaction is contingent on getting the approval from a third party.

Determine the Sales Price & Pricing Formula - If the sale will be of the assets, often there is a formula or methodology set forth to determine the price for inventory, accounts receivable, supplies and other items, and a flat amount for goodwill and miscellaneous items. If it is for a stock sale, there may be similar factors to consider in determining the valuation of the stock, or interest, in the company. It is important to determine these as best as possible early on in order for each party to consider the tax consequences.

Exclusions from the Sale - There may be valuable personal decor or other personal property of the owner, being used in the operation of the business, but that the owner wishes to retain post-sale, and these items should be identified up-front.

What to Do with Employees - Determine whether and which employees will be retained by the buyer or transferred to another seller-owned business.

Deadlines - There should be an expression of when each type of due diligence inspection must be complete, if and when any party may terminate the transaction the correlation between any termination and agreed upon consequences, when financing must be procured, and the deadline the transaction to be completed.

Termination - A general understanding of who may terminate the transaction, when, under what circumstances, and what and if there are to be any consequences to terminating the contract unilaterally.

Deposits - Any deposit money should be set forth, along with what happens to the deposit money in all possible scenarios.

Confidentiality & Non-Disclosure - The LOI is usually and largely non-binding, with the exception of the terms governing any deposit money; any choices of litigation forum, venue and jurisdiction in the event a dispute arises; certification of authority by the individuals signing; and the Confidentiality and Non-disclosure Agreements (the “CNDA”).

The CNDA is often an essential part of the LOI, or an essential document accompanying the LOI. In order to move in to the next phase of the transaction, the Initial Due Diligence phase, the Seller can be well-served by dictating how initial due diligence documents and other information are to be conveyed from the Seller to the potential Buyer, to whom the due diligence information may be disclosed; how and what point(s) the due diligence information may be viewed and/or returned to the Seller; and the consequences in the event of a breach of the CNDA. The CNDA document or portion of the LOI is always binding, and survives the termination or conclusion of the intended transaction.

If the initial terms are agreeable to the parties, the LOI is signed by authorized representatives.

Keep in mind though, if you are planning on selling the interest in your company, you may be subject to required disclosures, as governed by the Securities Exchange Commission. Make sure you consult with a lawyer before offering to sell the interest in your company, as opposed to its assets.

For information about how the Letter of Intent fits into an entire business sale and purchase agreement, read the post, How to Buy or Sell a Business, in 5 Phases, here.

Joshua Logan of Achieve Legal is a Florida-licensed Franchise and M&A Attorney, serving clients throughout Florida from Orlando, and nationwide through association with local counsel. You can call him at (407) 502-2580, or he can be reached by e-mail at JLogan@AchieveLegal.com

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