There are several million active businesses in Florida, and many are purchased and sold every day, consolidating industries and creating new opportunities. Most of these transactions begin with a letter of intent (LOI), which creates the framework of an agreement to sell some or all of another business. When seeking to buy or sell a business there are many items to consider, to leave in or take out. Therefore, an LOI is a preliminary indication of interest that is not intended to be legally binding.
If you are interested in buying or selling a business, having an experienced business attorney on your team is key. A knowledgeable attorney will help the buyer structure the LOI—and even to use it as a strategic way to learn more about the business before making a final decision. The seller’s attorney uses the LOI to strategically position the company, probe the prospective buyer’s intent, determine the best price, and as a starting point for sales negotiations.
What You Need to Know About Letters of Intent
While an LOI is generally non-binding and preliminary, it can include actionable items like confidentiality agreements. Indeed, if an LOI is written too specifically a court may uphold aspects of it as a binding contract. Just calling the document a Letter of Intent presents it as less contractually binding than a Memorandum of Agreement, which can include more specific details for nailing down a purchase.
Elements of an LOI include:
- Basic information about the preliminary purchase price and terms
- The type of purchase, such as whether the company’s assets are included, and whether it includes stock purchases
- An outline of areas for negotiation
- A timeline for the buyer to complete due diligence and the scope of the investigation
- Assurances of confidentiality for the buyer
- A no-shop clause that prohibits the seller from entertaining other offers
- Information on the buyer’s financing
- Conditions under which the deal would be terminated
The type of purchase, assets vs. entity, is particularly important to suss out in an LOI, both for the prospective buyer and the seller. An LOI seeking an asset sale is not planning to buy the entire company, but components of it (assets). An entity sale is the entire business. Each provides the seller important considerations to mull over: Might an asset sale leave them enough of the business to continue, perhaps in a different direction, as long as it doesn’t compete? Is the buyer’s choice of an asset purchase negotiable? In this scenario, an LOI is a jumping-off point for deeper conversations and considerations.
Common issues with LOIs include:
- Overpromising terms
- Vagueness in binding vs. non-binding clauses
- Failure to define key performance indicators
When an LOI opens positive negotiations with the seller, the business is generally removed from consideration by other buyers. What comes next is the buyer’s due diligence period of investigating the company’s strengths and weaknesses. Several aspects of the company’s market presence, legal compliance, and future prospects are analyzed during this process. Buyers often call in experts to examine specific areas of the business to assure their shareholders, bankers, and insurance companies that the transaction is a benefit to the brand and a risk worth taking.
Crafting the Right LOI for Your Business Transaction
A business attorney from WKFK Law is an experienced professional with years of purchase and sale negotiations behind them. We can put our knowledge to work for you, including our deep knowledge of Florida businesses, laws, and even strategic tax advantages. Drawing from this wealth of hands-on, practical involvement, our attorneys can guide you to the best outcome for your business. Contact us today for a consultation.
