David Young is a Partner at DLA Piper (http://www.dlapiper.com/). In this video he speaks about the letter of intent upon selling your business.
- Letter of intent: a non-binding purchase agreement
- For the seller, get as much detail as possible
- Exclusivity is the only binding part of LOI
- Detail beyond purchase price benefits the seller
- The buyer benefits from a vague LOI
So when you’re first looking to sell your company, so the first real item that comes up when negotiating for the buyer is what’s called a letter of intent. It’s basically a non-binding letter agreement typically with an exhibit that contains purchase price and other terms that outlines the key terms of the deal.
And it’s very important to really focus at that time as the seller where a lot of sellers, suddenly you’ve got an offer on the table and there’s a certain purchase price, you’d like the purchase price. And there’s a big desire to rush sign letter of intent, move on, figuring you can just sort out whatever issues there are in the definitive agreements or in the negotiations after signing that.
But, it’s really critical from the seller’s perspective. It’s important to get as much detail in the letter of intent as possible. The reason for that is that the one key binding provision or what’s otherwise a non-binding document is exclusivity where generally, there are some periods of exclusivity where you are prevented from talking to other buyers, prevented from talking to other potential investors.
Sometimes it’s 30 days, more likely 60 to 90 days. And the second the letter of intent get signed, as the seller your leverage drops dramatically. The buyer knows they’ve got you hooked. They know that you’ve agreed to the general terms of the deal.
And so from the seller’s perspective, the more detail on sort of the second level of issues as far closing additions and identification and escrows and all sort of other terms that comes to deal after purchase price. From the seller’s perspective the more that is in the letter of intent, the better off it is because you’re negotiating your time of leverage where the buyer will generally want to get a very vague letter of intent that just talks about purchase price.
Maybe even arrange your purchase price and then just says negotiate and get (paid) and everything else. Because in the buyer’s perspective, negotiating those items with exclusivity knowing other buyers are not in the picture puts them in the ideal position.
So again, when you’re selling your company, the very first important document with the buyer is the letter of intent, and it’s really important to spend the time, get good advisers, lawyers, investment bankers, whoever is involved and have them really help to get that document to the best shape possible.