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Why is a Non-Binding Letter of Intent Important in a Transaction?

Once a buyer and seller have finished their preliminary discussions on the terms of a purchase and sale of a business or real property, they will usually draft and sign a Letter of Intent (LOI) which describes the basic terms of the transaction.  Clients have often asked me about the purpose of a LOI since the document is customarily non-binding.  This means that even though the parties sign a Letter of Intent, they are not bound by its terms until a final contract is negotiated, drafted and signed by both parties.

A Letter of Intent is an important part of the transaction process for various reasons.  First, it shows that the parties are serious about their intentions to enter into a transaction.  Most parties do not want to spend money, time and effort on drafting a contract unless they are assured that the other party is serious about “doing a deal”.  Second, it may encourage a seller to provide more detailed information to a potential buyer about the asset to be purchased.  A seller may hold off in providing confidential information to a potential buyer unless it believes that the buyer is serious about trying to pursue a transaction in good faith.  Third, it may remove the worry about other competing offers.  Often, a LOI will have an exclusive dealing clause so that the transaction isn’t being shopped around at the same time that the buyer and seller are trying to negotiate with one another.  Finally, it may assist the buyer with financing for the deal, as a lender customarily asks for the Letter of Intent as part of its initial analysis.

While the exact terms of a Letter of Intent can very depending upon the transaction, it is important that the LOI sets forth the important deal terms.  The name of the parties, identification of the asset, financial terms including purchase price and deposit, due diligence expiration and closing dates, allocation of costs, reference to standard representations and warranties, identification of which party will draft the contract, exclusive dealing clause, expiration date and a statement as to the non-binding effect of the LOI are all important terms to consider including in the document.

For all of the above reasons and more, it is highly recommended that a Letter of Intent be negotiated and signed as the initial phase of any transaction involving the purchase and sale of a business or real property.

For more information, please contact Faith Harrison at the Harrison Law Group.

Faith E. Harrison

Author Faith E. Harrison

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