LETTER of INTENT for a Business Acquisition

Contact Neufeld Legal PC for corporate transactional and legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

A Letter of Intent (LOI) for a business acquisition is a preliminary, non-binding document that outlines the key terms of a proposed business transaction. It is typically the first formal document exchanged between a prospective buyer and a seller, serving as a roadmap for the deal and a signal of serious intent.

While the majority of an LOI is non-binding, certain provisions are often explicitly made legally enforceable to protect the parties during the negotiation and due diligence phases.

A letter of intent is a critical step in the business acquisition process for a number of important reasons, including:

• Establishes a "Meeting of the Minds": It confirms that both parties are in agreement on the fundamental terms of the deal, such as the purchase price and deal structure, before they invest significant time and money in a formal contract.

• Provides a Framework for Due Diligence: The LOI grants the buyer permission and a timeframe to conduct a detailed investigation into the seller's business, finances, and legal matters.

• Secures Exclusivity: The buyer often wants assurance that the seller will not negotiate with other potential buyers while they are performing their due diligence. The LOI can contain a binding "no-shop" or exclusivity clause.

• Protects Confidential Information: Since sensitive information is shared during due diligence, the LOI typically includes a binding confidentiality clause to prevent the misuse or disclosure of the information.

• Identifies "Deal-Breakers" Early: By outlining the key terms upfront, the LOI helps to quickly identify any fundamental disagreements that could derail the transaction.

Key clauses that are typically found within a letter of intent for acquiring a business include:

• Identification of Parties and Business: Clearly state the legal names and addresses of the buyer and seller, and provide a brief description of the target business.

• Proposed Transaction Structure: Define the type of transaction—is it an asset purchase (buying specific assets and assuming certain liabilities) or a stock purchase (buying the entire company)?

• Purchase Price and Payment Terms: Specify the proposed purchase price, which can be a fixed amount or a range. It should also outline the form of payment (cash, stock, seller's note, or a combination) and the proposed payment schedule, including any earn-outs or holdbacks.

• Due Diligence Period: State the duration and scope of the due diligence process, during which the buyer will review the company's records. This section often outlines the buyer's right to access financial statements, contracts, customer lists, and other critical information.

• Binding and Non-Binding Provisions: This is the most crucial section. It must explicitly state that the LOI is a non-binding expression of intent, but that certain specific clauses are legally binding and enforceable.

• Confidentiality Clause: A legally binding provision that requires both parties to keep all information related to the transaction and the due diligence process confidential.

• Exclusivity Clause: A legally binding provision that prohibits the seller from soliciting, negotiating with, or providing information to other potential buyers for a specified period. This is often a deal-breaker for buyers who are investing time and resources in the process.

• Closing Conditions: A general list of the key conditions that must be met before the transaction can be finalized, such as obtaining financing, securing regulatory approvals, or getting third-party consents for the transfer of contracts.

• Allocation of Expenses: Specify which party is responsible for certain costs incurred during the process, such as legal fees, accounting fees, and advisory fees.

• Termination Clause: Outlines the conditions under which either party can terminate the LOI and the consequences of termination.

When it comes to the legal component of corporate mergers & acquisitions, that is when the law firm of Neufeld Legal P.C. comes into play. Such that when your company is seeking knowledgeable and experienced legal representation in orchestrating and completing business mergers, acquisitions and divestitures, contact us at trong>403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.