What's in a Letter of Intent, and is it binding?
A Letter of Intent (LOI) plays a crucial role in the process of business takeover and sale. It provides both buyer and seller with a clear basis for negotiations and helps document key agreements. In this article, we explain what an LOI is, what it contains, why it's important, and whether it's binding.
Why a Letter of Intent?
1. Make clear agreements
An LOI helps both parties clarify their intentions and enables them to quickly move on to the next phase of negotiations. It provides structure and ensures that the key terms are clear to both parties.
2. Ensure exclusivity
By signing an LOI, both parties can gain exclusivity for the process. This means no negotiations with other parties take place during the agreed-upon period, increasing the likelihood of a successful transaction.
3. Basis for due diligence
The LOI provides the basis for due diligence, allowing the buyer to obtain in-depth information about the company they are acquiring. This allows both parties to identify potential risks and benefits before signing the final agreement.
What is in a Letter of Intent?
An LOI contains several important aspects that the buyer and seller agree on. Below are the most common components:
What is being sold?
In a share transaction, the percentage of shares transferred is specified, while in an asset-liability transaction, the specific assets and liabilities that will be transferred are defined.
The price
The LOI contains a preliminary price agreement. However, the final price may change based on the results of the due diligence or other factors.
Confidentiality
The document often includes a confidentiality clause, obligating both parties to keep confidential information secret. This is usually further supported by a separate non-disclosure agreement (NDA).
Payment terms
The LOI may specify when and how the purchase price will be paid. This could be a partial payment at closing, with the remainder paid through an earn-out or in installments.
Due diligence
After signing the LOI, the buyer will start with the book research, in which the financial, legal and fiscal status of the company is thoroughly checked.
Is a Letter of Intent binding?
Generally, an LOI is not binding, except for the specific obligations it contains, such as confidentiality or exclusivity. The LOI is intended to lay the foundation for negotiations and gives the parties the opportunity to further develop the final terms. However, it's important to clarify which parts of the LOI are binding and which are not, to avoid misunderstandings and legal complications.
Why choose Match Plan?
With over 30 years of experience in business acquisitions and transaction management, Match Plan understands the importance of laying a solid foundation with a detailed Letter of Intent. Our experts can help you with:
- Drawing up a clear and structured LOI.
- Negotiating the terms and obtaining the right agreements.
- Guiding the due diligence process and the final completion of the transaction.
A well-drafted LOI is essential for a successful acquisition. Contact us and discover how we can help you ensure smooth and successful negotiations.
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