Why a Business Seller Should Have a Lawyer Review the Letter of Intent

A letter of intent (“LOI”) is a critical document in the process of selling a business. It outlines the key terms and conditions to be negotiated. This is meant to ensure the buyer and seller are aligned on major points before making the more substantial investment required as the transaction progresses. Because the LOI lays the groundwork for the deal and the timing and expectations of both parties, a seller should always seek attorney review before signing.

The LOI addresses crucial elements including the proposed purchase price and payment structure, an anticipated deal timeline and periods of exclusivity and non-competition. It may also include contingencies, due diligence requirements and allocation of risk between the parties. A skilled mergers and acquisitions (“M&A”) attorney plays a vital role in reviewing the LOI, protecting the seller’s interests, flagging risks and paving the way to a successful sale.

A common and potentially costly mistake is assuming the LOI is entirely non-binding. While certain provisions relating to price or broad deal terms are often non-binding, LOIs frequently include clauses that are enforceable in court. These include:

• confidentiality rules, which restrict disclosure of sensitive business information during the sale
• provisions detailing payment of break fees or expenses if the deal collapses
• “no-shop” exclusivity provisions, which prevent the seller from soliciting or negotiating with other interested buyers for a set period

Exclusivity provisions are common in an LOI. Buyers naturally seek time to complete diligence without fear of seller “shopping” the deal, but lengthy or open-ended no-shop periods can leave sellers exposed. Legal counsel can negotiate fair timeframes tied to buyer’s progress, retain seller leverage, and, where warranted, permit the seller to pursue backup options if a transaction should stall.

The LOI’s fine print often submerge important details. Will the seller receive all cash at closing, or are there deferred payments, holdbacks or purchase price adjustments for uncollectible receivables or working capital fluctuations? Is a portion of the price contingent on future performance (an “earnout”) or is the seller expected to provide financing or accept buyer equity? An experienced lawyer is essential to flagging material or ambiguous language that could become impediments to the deal.

The LOI also has impact on the due diligence stage of the deal. Here again, legal oversight is paramount. Sellers must carefully limit the scope and duration of due diligence, guard against overly broad investigation periods and require robust protections for any proprietary or confidential information disclosed. Without legal advice, sellers risk granting buyers excessive latitude, which can weaken the seller’s negotiating position and exposing sensitive data. Sellers should also insist on provisions that control if, when and how buyers may approach key customers or employees.

Another key reason to involve an attorney is to ensure clarity. Ambiguous or badly drafted terms in the LOI frequently lead to delays, disputes and “re-trading,” i.e. trying to renegotiate agreed terms later in the process. A lawyer-reviewed LOI greatly reduces the need for costly renegotiation.

The Law Offices of Donald W. Hudspeth, P.C. in Phoenix represents companies of all sizes in M&A transactions throughout Arizona. Call us at 866-696-2033 or contact us online to schedule a consultation.