The Letter of Intent (LOI): 6 Functions
When we work with sellers the subject of the LOI can be one of the most confusing. Why would I sign a non-binding agreement to sell my company? Very simply, it’s a starting place for the commitment to execute a transaction. If you can’t (or won’t) agree on an LOI, it is very tough to advance to a more detailed purchase agreement:
The LOI serves multiple functions in a transaction:
- It signals the good intentions of two or more parties to work together toward a purchase agreement, including the commitment of the seller to take the company off the market.
- It typically sets forth the most important macro elements of the offer, including the price, terms, non-compete provision, and proposed transaction timelines.
- It is non-binding and allows both parties the opportunity to walk away if it appears a final agreement cannot be reached.
- It provides a platform for intensive due diligence, which is often a major step for the seller who will essentially “bare the soul” of the company.
- It creates a relatively safe environment for both parties to explore other options (e.g. earnouts) that might facilitate the transaction when challenges arise, including the final sales price.
- It encourages the seller to seek out tax and legal expertise to better understand the full personal impact of the transaction instead of waiting to the last minute.
Effective seller-buyer relationships are often initiated during the LOI, so it’s worth spending the time to consider potential concerns in the transaction. Left unaddressed at this point they can become significant obstacles to closing a mutually beneficial transaction.