Tag Archives: LOI

Don’t Be Coy With a Letter of Intent

I recently worked on a deal where the prospective seller over-strategized the letter of intent. The seller wanted my client to sign a non-binding LOI that contained about half of what should have been included in the letter. It was extremely frustrating and ultimately was a waste of time, because rather than acquiesce to the seller’s demands, my client walked away from the deal.

While the LOI was “non-binding” in every way (and the seller kept repeating that), that wasn’t reason enough for my client to proceed. Basically, my client didn’t want to push forward without knowing more terms. And I can’t blame him. Why start the acquisition process without sufficient knowledge of basic terms?

I assume the seller was either not that serious about selling or is trying to gauge a potential buyer’s interest, but either way you run the risk of alienating potential buyers.

Using a No Shop Clause in a Letter of Intent

If you are buying a business, the process becomes expensive and tedious once the letter of intent is signed. For this reason, I recommend all buyers include a “No Shop” provision in their LOI. This provision prevents the seller from going behind your back and finding other suitors while you are busy with due diligence and financing.

Sellers should find this clause acceptable, but be prepared for them to counter with a time limit for the no shop. The seller doesn’t want to be tied up forever and will hope the time constraint gets you going faster so that the deal won’t fizzle.

Include Confidentiality Clause in Letter of Intent

When negotiations need to remain confidential, a letter of intent should obviously include a confidentiality cause. But in the case of startup companies–replete with their fresh and new ideas–a confidentiality clause is a requirement. Information will be exchanged during due diligence and the negotiations, thus the parties should agree on what information is confidential.

In most cases, the parties will expressly state that all information is confidential unless otherwise provided and that the obligation of confidentiality survives the term of the letter. Additionally, the parties should agree to the level of confidentiality that will be required regarding the terms of the letter of intent, the ongoing negotations, and any other information deemed confidential.