A letter of intent is used by a buyer and a seller to memorialize their intent to negotiate toward a sales transaction, and includes a general description of some of the fundamental terms of the deal. Naturally, any document that illustrates intent in an M&A transaction can have far-reaching implications for both parties.
“Even though letters of intent usually do not create binding obligations, they heavily influence future negotiations between the parties. And, if not drafted carefully, they may create unintended legal obligations,” says Todd Kegler, a director at Kegler, Brown, Hill & Ritter and the chair of the firm’s M&A area. “Business people frequently negotiate letters of intent without involving legal counsel; however, most would benefit from engaging counsel as early as possible and, at a minimum, prior to signing any letter of intent.”
Smart Business learned more from Kegler about how to approach a letter of intent from both a buyer’s and seller’s standpoints.
How should a business negotiate and craft a letter of intent?
The primary function of a letter of intent is to provide each party with some assurance that they’re in general agreement regarding the basic terms of a transaction prior to either party spending significant resources on comprehensive due diligence and preparing and negotiating definitive agreements.
A seller’s bargaining power is usually greatest prior to signing a letter of intent that contains any type of exclusivity provision. Accordingly, a seller generally should attempt to negotiate a letter of intent that is detailed and explicit with respect to the material terms of the transaction.
By contrast, a buyer’s bargaining power usually increases after signing a letter of intent that includes an exclusivity provision. Consequently, a buyer will often prefer to negotiate a non-specific letter of intent, using general language and deferring the most difficult negotiation issues until a later date. Of course, there are exceptions, such as when a transaction will require a unique or material covenant from the seller, in which case a buyer may prefer to address that issue early to be sure that the seller will agree before proceeding further.