How to Draft a Letter of Intent for Business Transaction

Letter of intent is an important instrument for business transactions. In order to have discussions with the seller, it is a customary practice to sign a confidentiality agreement and have a letter of intent signed.

While ensuring your interest in the business acquisition, these documents will come handy  for the upcoming negotiations acting as the basic intent of the party as well as protecting sensitive information of both parties.

In order to draft a document providing optimal protection for each party, following points mentioned should be kept in mind. In order to have a freelance letter of intent to purchase business  drafted according to your interests as well as without any loopholes, it is important that you appoint an experienced corporate lawyer. 

A letter of intent of purchase or any other similar business dealing is mostly preceded by a confidentiality agreement with an objective to protect the information as well as the documents belonging to both parties. It would include financial data, customer and supplier lists, and intellectual property information which shall be communicated in the due diligence process.

A confidentiality agreement is important for a potential buyer to have access to the information he or she needs in order to formulate a letter of intent, to make an offer related to the business or to withdraw some interest, if any. The potential buyer would agree therefore, that such  information can be used for the purposes of evaluating the proposed transaction only.

The Letter of Intent

A letter of intent will generally act as a catalyst to initiate the process for acquisition or a joint development agreement for a business.

The document would reassure the party the willingness of the other to submit a potential bid, would help lay down  key elements of the business transaction and, if required, can also assure a period of exclusivity during the negotiations.

Though the document is of legal nature; however the letter of legal intent is not intended to be fully binding, unless otherwise stipulated thus in an expressed manner.

At this stage of the negotiations, the buyer and the seller do not have to make an official offer to proceed with a transaction. However, still  the letter of intent must create binding obligations on one party or the other, particularly in regard to confidentiality and exclusivity regarding the said business transaction

Clauses Which Shall Be Included in a Letter of Intent

A letter of intent may include general clauses and some specific ones, including:

• nature of the proposed transaction between the parties 

• identification of the people involved with the transaction

• price range decided for the acquisition, subject to amendment and the terms of the payment decided later on after the due diligence process is completed

• the period during which the seller agrees not to solicit or consider offers from others for purchase without previously speaking with the buyer as well as the penalties associated with breaching the commitment shall be mentioned in the letter of intent.

• Condition that the buyer may withdraw from the business process at any time in case the transaction will not provide the expected gains will be included in the letter of intent as well

• usual closing conditions of a business transaction

Specific Objectives and Aim to Achieve With Letter of Intent

Write the Introduction:

In the introduction, you should state what the purpose of the document is and should also mention the names of both parties and their respective roles. In addition, you should include a description of the transaction (what it is you intend to buy or sell).

Describe the Transaction and Timeframes

This section of the letter provides a more detailed description of the transaction, including the type of business deal you will be entering and a possible purchase price, although this could be subject to change. You could also enter preliminary timeframes about immediate future negotiation processes, but these should only serve as guidelines and may also be subject to change.

List Contingencies

In this section, both the buyer and the seller can list contingencies that need to be in place for the negotiations to continue. A common contingency, for instance, is that the closure of the deal depends on the ability of the buyer to secure financing. Or, that the transaction will only take place if the buyer is satisfied with the due diligence processes.

Go Through Due Diligence

Due diligence is where both parties disclose necessary information about future proceedings so that there are no surprises during the ongoing negotiations. This may involve checking records, providing notice that a party will be requesting certain documents and verifying tax and legal documents.

Include Covenants and Other Binding Agreements

Although the LOI is not legally binding, both parties can include sub-agreements, called restrictive covenants, which are binding. For instance, a nondisclosure agreement protects both parties by prohibiting them from using information shared during the negotiations for any other purpose but the deal.

State That the Agreement Is Nonbinding

It is important to insert a section that explicitly states that the letter is nonbinding for both parties, except for the subsections you have included.

Include a Closing Date

It could also include a date by which the parties should conclude the deal. If the parties have not concluded the transaction by the closing date the intended transaction and the LOI terminate.

A Document Which Has Legal Weight

Though a letter of intent is not intended to create contractual obligation on the parties to close a deal, it does not mean that it is not having a legal weight.

It is, thus, advised to contact an advocate specialising in corporate law from the initial stage itself, who can provide a good legal framework so that documents correspond perfectly to your intentions.

After the main points of concern have been listed in the letter of intent, it would be time to proceed with the required process. After which one shall be able to write the final agreements leading to closing the acquisition.

Lead India Law offers you a team of experienced corporate lawyers who have been assisting businesses with various procedures and processes such contract drafting, reviewing legal documents, etc which are related to the business law. Thus, if you wish to talk to a lawyer or seek free legal advice online for freelance contract drafting or any other legal issue,  you may contact us.