The seller and buyer fix important transaction details in the Letter of Intent. This article presents the most important components of the Letter of Intent and shows where it can be worthwhile for sellers to negotiate with a particular commitment.
The Letter of Intent: the heart of the company sale
Creating a Letter of Intent (LOI) can be advantageous, especially when it comes to buying or selling companies and rental or software contracts. After signing the Letter, the investor usually begins the due diligence, the careful examination of the company and its business model, immediately. Therefore, this document regulates the starting point and duration of the due diligence. In the interests of a speedy transaction, two months are no longer scheduled for due diligence in most transactions.
The Letter of Intent also contains an initial, non-exhaustive list of the documents and information the investor needs to do due diligence. As a rule, the seller bundles this information in advance in a virtual data room, to which he grants the investor access for due diligence. Here you can read more about virtual data room.
Two central elements of the LOI are detailed company valuation and formulated modalities of the transaction. Even if the Letter of Intent does not replace the preparation of transaction documents, it does set out the basic terms. Although there is no legal requirement regarding these terms, the buyer should make the following terms explicit in the document to force the seller’s position on them.
The advantages of the LOI are as follows:
- Protection of sensitive data, information, and intellectual property thanks to non-disclosure clauses;
- Minutes of negotiation and contract talks (the most important points should be recorded in the Letter);
- Seriousness and trust towards the negotiating partner are evident;
- Specification of timing and prices;
- Project planning or contract conclusion is easier to imagine.
The common structure of the Letter of Intent
Legal advice should be obtained before creating any Letter of Intent. Because a final contractual commitment is not wanted in most cases, an expert should check this again to avoid unwanted explanations. In addition, for the contract to have legal force, the text of the Letter must contain a direct indication of the obligations of the parties to conclude the main agreement.
In general, the LOI should contain the following items:
- Setting data of the parties. It includes the full name of individuals or the name of a legal entity, together with the surname and initials of the official signing.
- A brief description of the future contract will be concluded by the parties subsequently. At the same time, it should be indicated what type of such an agreement will be, regarding what nature of the transaction it will be concluded, and some other nuances.
- The time required to sign the main contract. This paragraph is not mandatory – if the terms for concluding the main contract are not specified, it is considered that they are no more than a year from the preliminary document’s conclusion date.
- Responsibility of the parties and provision of the contract. The text of the agreement of Intent may consider the conditions under which the parties risk being held accountable to each other, the nature of such liability, and the obligation to pay penalties or compensation.
- Signatures of the parties and seals if the contract is concluded with the participation of legal entities.