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A Letter of Intent (LOI) should set out the key terms of an acquisition before the parties negotiate the final agreement. Although these letters are typically non-binding, business owners should give careful consideration to terms beyond the purchase price. A poorly drafted LOI can slow negotiations and weaken a business’s position if a legal dispute arises. Call Structure Law Group, LLP, to speak with a Silicon Valley mergers and acquisitions lawyer about drafting a Letter of Intent.
M&A Letters of Intent: Critical Terms Beyond Purchase Price
In addition to identifying the parties, a Letter of Intent should include:
- Transaction Structure. The Letter of Intent should identify whether the transaction is an asset purchase, stock purchase, or merger. The selected structure has liability, tax, and regulatory consequences that should be addressed in advance.
- Financing Terms. If the acquisition depends on securing financing, the Letter of Intent should disclose the source of financing or the timeline for securing adequate funding. Funding is often contingent and should be spelled out in the Letter of Intent.
- Due Diligence. A buyer should thoroughly investigate a company before closing the transaction. For this reason, include the scope of due diligence in the LOI. For example, most buyers seek access to financial records, employee contracts, vendor agreements, intellectual property, and litigation information.
- No Shop Clause. Often, a buyer wants the seller to stop negotiations with other potential buyers. Include a “no shop” clause to that effect. Typically, exclusivity lasts for a limited amount of time, often up to 90 days.
The buyer might also want to be notified if the seller receives any unsolicited offers. These can provide key information about how the market values the company.
- Confidentiality Provisions. These are key, especially as the target company opens its books and trade secrets for a potential buyer’s inspection.
Non-disclosure agreements often cover the potential sale itself, but should also cover disclosure of IP or proprietary information, such as customer lists. Work with an attorney at SLG to better understand what material will be disclosed and how an NDA can protect it.
- Conditions to Closing. Are there any conditions that must be satisfied before you are obligated to close? These should be set forth in the Letter of Intent. Typical conditions include no materially adverse change to the business, Board approval, regulatory approval, and/or adequate funding. Discuss these with your SLG lawyer.
If a condition is not met, the buyer or seller has the option to walk away. Contingencies offer the necessary protection.
- Governing Law. Your choice-of-law provision can play an outsized role if you end up in litigation. Parties can choose which state’s law applies to the dispute.
- Termination of the Letter. Also include information about what terminates the letter. Different triggers include mutual termination, reaching a certain date, and so on.
Speak with Our M&A Legal Team for Assistance
A Letter of Intent is a critical first step that establishes the framework for the remainder of the transaction. Although many LOI provisions are non-binding, the document can influence negotiations, allocate risk, and identify issues that require further diligence before the parties commit to a definitive agreement. Careful drafting at this stage can help reduce misunderstandings, streamline negotiations, and create a clearer path toward closing.
Structure Law Group, LLP advises founders, investors, buyers, and sellers throughout California on mergers and acquisitions, including Letters of Intent, due diligence, transaction structuring, and definitive acquisition agreements. To discuss a proposed acquisition or the preparation of an LOI, contact a Silicon Valley mergers and acquisitions attorney at Structure Law Group, LLP.