Letters of Intent

When you are purchasing a business or a piece of commercial real estate, you will almost always start off with a Letter of Intent.

What is a Letter of Intent?

Such a letter sets out the basic economics of the transaction – what is being sold (assets or stock?) and for how much, payable when and how. Some other key terms are usually set out in simple terms -- e.g., assumption of liabilities or not, non-competes for key personnel, and a closing date. The Letter of Intent lets each side know that it is worth the time, energy and expense of doing “due diligence” and having a formal contract drafted.

Clients always rightly want to know if the Letter of Intent will be binding or not. The short answer is that for the most part, they will not be binding – for the simple reason that it is usually in the interest of both parties to check out (perform “due diligence”) the other side to make sure they can get what they want out of the deal before committing themselves legally to the transaction. So, there will usually be a provision that says that the Letter of Intent is not binding on either party until a formal contract is signed.

However, there are two areas that most Letters of Intent expressly provide are binding on the parties – and binding as soon as the Letter of Intent is signed. First is an agreement not to disclose the confidential information from the other party, and there is usually an extended definition of what is, and what is not, confidential. Second, there may be an agreement (usually by the Seller) to deal exclusively with the Buyer for some period of time. This is to allow time to reach an agreement without having the rug pulled out by the other side’s trolling for better deals with others.

There may also be circumstances where one or both sides may have good reason to make a Letter of Intent binding. This should not be done lightly, however, and the Letter of Intent may be written so as to provide an “escape clause” under certain conditions.

The most important things are to clearly state each side’s expectations and assumptions going into the deal and to make an intelligent and transparent choice regarding which terms, if any, of the Letter of Intent will be binding.