Letter of Intent Essentials

Selling your business involves many different stages of negotiation. As the seller, your goal is to obtain the maximum value that you can for it. Thus, you must take full advantage of every step of the negotiation process, beginning with the letter of intent (LOI) or term sheet.

• Include all major deal points . If you are the seller, it is important to understand that you have the most negotiation power at the LOI stage. Many sellers erroneously fail to take the LOI negotiations seriously because the term sheet is non-binding. However, failing to negotiate the key terms of the transaction at this stage will likely lead to the buyer refusing to include them later. As soon as the LOI has been signed, the power shifts to the buyer because you have committed mentally and emotionally to the sale. Most buyers understand that a seller will be unlikely to argue over a deal point if it will put the sale in jeopardy. Therefore, to be safe, you should include all major terms in the LOI as a means for ensuring that you get the final contract that you want.
• Clarify binding provisions . The LOI should clearly state which provisions are binding and which are non-binding. The most common binding terms in a LOI are confidentiality requirements , exclusivity provisions and other similar agreements that protect the parties if the sale should fail to close.
• Set the standard . Because the term sheet is the first step in negotiations between the parties, it is also the first opportunity to set the tone of the transaction. Making the mistake of not taking the LOI seriously can result in the buyer viewing you as desperate. You want your first impression to be one of strength and fairness.
• Be reasonable . While you should take the LOI negotiations seriously, you should also remember that it is not the final agreement and not all of the details must be worked out. Find a way to negotiate the key terms while leaving the less important details to be worked out later.