The parties to a sale of a business often sign a letter of intent containing general deal terms before drafting up the binding sale documents. Used properly, such letters of intent are valuable aspirational statements of the key terms, allowing the parties to negotiate the details with confidence that their time and resources will not be wasted. But as with all documents of significance, letters of intent should be negotiated with care. While letters of intent are generally non-binding (although that should not be presumed), they can be gamed by one side to gain an early negotiating advantage.
My view is that letters of intent should be limited to each party’s “must-haves,” terms that if not made part of the deal, one party would bolt. These terms include but are not necessarily limited to:
- Nature of the sale – is this an Asset Purchase or a Stock (or Membership Interest) Purchase?
- Price and financing terms.
- Noncompetition covenants, if any.
- Personal guaranties, if any.
- Training or consulting required of the seller.
This sounds intuitive, but it’s not easy. One of the frequent issues I see with letters of intent is a disparity of preparation. One side (usually the one that drafts the LOI and is represented by an attorney of business broker) comes prepared with all of its must-haves. The other party (unrepresented at this point) trusts that any of its must-haves not included in the LOI can be added to the final sales documents. Alternatively, I often see one side load the letter of intent with more than just its must haves.
Both these situations put the other party at a disadvantage in the subsequent negotiations. Although LOIs are usually non-binding, it can be difficult for a party to change its position. A deviation from the letter of intent can bring complaints from the other side. Sometimes the complaints are warranted, sometimes they are simple gamesmanship.
In the following negotiations of the sale documents, it can be difficult for one party (Party A) to walk-back its prior assent to the other party’s (Party B) terms. It is comparatively easy for Party B to decline Party A’s request to add terms that were not in the letter of intent. It’s also more difficult for Party A to horse-trade something it wants for something that Party B had the foresight to put in the letter of intent. Contracts are made up of myriad terms, few of which exist in complete isolation. The inclusion or exclusion of one term may change how a party looks upon another term, even one that is seemingly unrelated. Party B in this discussion has succeeded in presumptively taking its terms off the bargaining table when the time comes for additional terms to be negotiation.
Party A would have been well advised to lawyer-up before signing the letter of intent. I recommend against going into any stage of a negotiation by yourself, when the other party is represented by a lawyer or business broker. An attorney should do more than only draft contracts and the legalese. An effective attorney is also a negotiator and communicator, with the knowledge and experience to avoid difficulty at all stages, including the letter of intent.