Letters of Intent – A Basic Introduction
When buying or selling a business, a letter of intent (“LOI”) can be a useful tool for the parties to find common ground on the relevant commercial and legal terms. Typically, the LOI is entered into at the outset of a transaction, prior to the due diligence stage, before the parties have committed any significant time or resources to the deal. They are most often general in nature and intended to assist the parties in the subsequent negotiation of a definitive purchase agreement.
- Parties. The LOI should clearly state the identity of the purchaser(s) and the vendor(s), and whether any rights are assignable to a third party (e.g. if an individual enters into an LOI, but wishes to incorporate prior to the closing)
- Assets vs. Shares. The LOI should set out the nature and general scope of what is being bought or sold (assets or shares). For example, if it is a share sale, the number and class of shares to be purchased.
- Purchase Price. It is standard practice to include the purchase price in the LOI. However, in some cases, the final purchase price may be subject to change depending upon information which emerges as a result of the due diligence process. In addition, it can also be useful, when discussing purchase price, for the parties to agree whether there will be any earn-out by the vendors or post-closing consulting arrangements.
- Important dates. To ensure the transaction progresses in a timely manner, it is prudent to propose a timeline including dates for the signing of the purchase agreement, the target closing date or other important milestones.
- Due diligence. LOIs typically specify that the purchaser will have the opportunity, prior to the closing, to conduct appropriate due diligence. For example, examination of financial records, corporate records, inspections, testing and appraisals of assets, etc.
- Formal Purchase Agreement. The LOI should acknowledge that the parties will enter into a formal purchase agreement prior to the closing date which is in a form acceptable to each party’s lawyer and which contains representations, warranties, covenants and other agreements customary for the purchase of a business.
- Confidentiality. Often, LOIs restrict public disclosure made by either party concerning the transaction without the other party’s prior written consent.
- Exclusivity. From the purchaser’s perspective, it is useful to include an exclusivity provision in the LOI which prohibits the vendor from advertising the sale of its business or entertaining offers from other potential buyers prior to the closing.
- Deposit. As a demonstration of good faith, vendors will often require purchasers to make a deposit towards the purchase price. The drafting of the deposit provision is important and can have serious consequences if the transaction does not close. For example, is the deposit refundable or non-refundable? If it is refundable, what are the conditions upon which it can be returned to the purchaser? Who will hold the deposit (e.g. the vendor’s lawyer or the purchaser’s lawyer)?
Binding vs. Non-Binding
There is much debate (and misconception) surrounding whether LOIs should be binding or non-binding in nature. The answer to this question largely depends upon the level of negotiation between the parties and whether they intend to enter into a more formal purchase agreement prior to closing (which is highly recommended). However, in practice, LOIs often contain a number of provisions which are non-binding. In addition, many LOIs will contain conditions which would allow a purchaser to abandon a transaction under certain circumstances, for example, if they are not satisfied by the results of their due diligence.
Typically, if LOIs contain any binding provisions, they will be with respect to confidentiality, exclusivity (if applicable), treatment of the deposit and governing law/jurisdiction.
For more information on letters of intent or buying/selling a business, do not hesitate to contact Murphy & Company at (604) 360-7014 or by email at: email@example.com
This article is not legal advice and is not intended as legal advice. This article is intended to provide only general, non-specific legal information. This article is not intended to cover all the issues related to the topic discussed. The specific facts that apply to your matter may make the outcome different than would be anticipated by you. This article is based on British Columbia law. You should consult with an attorney familiar with the issues and the laws of your country. This article does not create any attorney client relationship and is not a solicitation.