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by | Apr 16, 2024 | Business Law, Commercial Real Estate Law, Firm News

A carefully drafted letter of intent (LOI) is a critical part of any business transaction.  After the parties have met, discussed ideas and basic business parameters, it is time to reduce these discussions to paper.  The LOI is a way to move the transaction forward from initial informal discussions to a more detailed exchange of both the legal and business requirements of the proposed transaction.

Set forth below is a list of deal points that a typical LOI might address.  Please understand that this is not an exhaustive list and the transaction will dictate what should or not be in a LOI.  It is important that you engage legal counsel before you sign an LOI, and not after.

Binding and Non-binding terms in the LOI.

Most LOIs would have both binding and non-binding terms.  The proposed transaction terms should be non-binding and allow the parties the opportunity to complete due diligence and reduce detailed transaction terms to writing.  The parties must be careful and not to make the LOI the definitive and binding written agreement for the transaction.  There have been instances where courts held that if an LOI contained all required material terms and did not have protective language to the contrary, the LOI was the operative agreement and held the parties to the business terms (e.g., a potential buyer was obligated to buy a company after signing an LOI).

There are also terms in a LOI that you want to make binding.  For example, confidentiality and exclusivity are important terms to consider.  The potential buyer will want to take the target “off the market” for a defined period of time while it invests time and money in a due diligence investigation.

Identify Basic Transaction Terms.

Identify the basic asset (or stock) being sold, including goodwill, intellectual property (if any) and the key agreements that would be assumed.  For example, real estate, equipment and/or license agreements.

Purchase Price.

Clearly identify the purchase price and all of its components.  What is the total value of the consideration and how will it be transferred?  Deposit, cash at closing, promissory note, stock, earn out agreement?


Is the transaction contingent on securing financing?  If so, consideration should be given to identifying the amount needed to acquire the assets and operate during a transition period while accounts receivable build up.  What interest and repayment terms would be acceptable?

Purchase Price Adjustments.

An adjustment to purchase price would be needed when there is a period of time between signing the agreement of sale and closing.  During this time, the seller would be obligated to operate the business in the ordinary course with the aim to keep both work in process and inventory within an acceptable level.  To the extent this does not happen, adjustments to the purchase price would need to be made at closing.

Excluded Assets.

Clearly identify what assets would be excluded from the sale.  Aside from cash, accounts and receivables, are there any specialty items that would not transfer?  Specific vehicles or equipment?

Excluded Liabilities.

Identify and exclude employee liabilities including unpaid wages through closing or underfunded pension plans.  Bulk sales tax laws should be considered as well as state and federal taxes in general.  Environmental liabilities.  Outstanding obligations under any real estate leases would need to be addressed.  How would indemnification operate in relation to the foregoing?

Costs and Expenses.

Clearly state that each party would be responsible for its own transaction costs and expenses.

Due Diligence.

What information would be required to comply with due diligence?  Access to records, bank transactions, employees, customers and premises would need to be considered.  Would real estate be altered and if so, who would have the responsibility to return the property to pre-inspection condition?  Would the seller have the right to view a copy of the report?  Under what circumstances would either party have the ability to terminate the agreement? How would this impact any initial payment?

Restrictive Covenants.

Consideration would need to be given to restrictive covenants that focus on competition, solicitation and disparagement.  This is especially important in light of the growing trend that disfavors these types of restrictive clauses.  Can more protection be gained by a narrowly tailored confidentiality agreement?

Required Third Party Consents.

Are third party consents required for the transfer of key contracts?  This may be a long lead time item.  For a detailed discussion please review our prior blog on this topic by clicking here.

These are just a few of the considerations that the business-minded attorneys at Anderson Leavitt consider when we represent our clients in their business transactions.  The LOI is not just a boiler plate document but a carefully thought-out approach that guides the transaction.

If you have any questions regarding your need for a letter of intent, or any other aspect of your transaction, please feel free to contact any of our business attorneys at Anderson Leavitt.

This entry is presented for informational purposes only and is not intended to constitute legal advice.