Letter of Intent and Term Sheet in a Business Transaction

What is the Purpose and What is Necessary?

Often times in a business transaction where a business is buying or selling a business, a Letter of Intent and Term Sheet is agreed to in order to set the stage for the transaction.  Generally the buyer will present to the seller a letter of intent to set out the terms and conditions for the purchase.  This generally is presented to the seller after there has been preliminary discussions regarding the purchase and sale.  The terms and conditions of the letter of intent can certainly be negotiated by the buyer and seller but negotiation is not necessary.

The letter of intent generally lays out the material terms and conditions for the purchase.  It is not generally intended to be the complete terms and conditions but the larger and most important terms and conditions for the transaction.  The letter of intent can and often times provides that the parties will attempt to agree as to the definite terms and conditions within an agreed upon time frame.  These definite and final terms are then incorporated into the final purchase agreement.

Letters of intent generally include terms and conditions such as the following:

  • Whether the purchase will be an asset purchase, stock purchase or merger;
  • The specific assets to be purchased;
  • The purchase price and how the price may be adjusted;
  • The manner of payment of the purchase price;
  • The length of time and process for due diligence;
  • What conditions are applicable for either the buyer or seller prior to the closing;
  • Employment of employees of the seller; and
  • Termination of the letter of intent.

Is this Binding?

Letters of intent generally refer to a beginning stage for the buyer and seller regarding the proposed transaction.  Many times, the terms and conditions in the letter of intent are preliminary in the conversation.  These terms could be binding or non-binding depending upon the terms written into the agreement.  Many times, the terms are non-binding but the agreement should provide the specifics for clarity.  Quite often, the parties want to preserve the right to terminate the transaction if the material terms cannot be agreed to.

If you have any questions regarding letters of intent, please let us know.