One thing is certain. In the world of business all deals start with paper. Whether it’s a merger or acquisition, there’s a framework that moves the negotiation.
Your letter of intent gives a general overview of the proposed deal. At this point there isn’t anything legally binding. The goal of this document is to simply confirm your relationship with the other party.
Instead of wasting your time with another template, leaving you without the “why”, I’m going to reveal five costly oversights. Each of these “early warnings” will give you the power to state your case with accuracy.
*** Understand the Goal of the Document ***
First of all, this document needs to be specified as a letter of intent and nothing more. This gives you the chance to walk away when you spot an unexpected turn.
You must note if any shareholders or employees will be affected. You also need to include any liabilities that will be transferred.
There needs to be a final understanding of three things. The date of the closing, which person on your team needs to be contacted upon closing, and what the next steps will be.
*** Always Protect Yourself ***
Make it clear in the document who can view your company’s confidential information – maybe the buyer’s broker, attorney, etc. You should specify who the buyer can contact for your records.
A simple way around this is to disclose binding provisions and non-binding provisions.
An example of a binding provision would be access granted to your books. While a non-binding provision would be your full cooperation during the due diligence of the buyer.
*** Avoid Legal Troubles ***
Most letters of intent are not legally binding, but due to their nature, can still cause trouble if anything is stated the wrong way or omitted. The benefit of this document is to lay the ground work before getting into the hard core legal details.
Use this as an opportunity to seek counsel from an attorney with experience in your industry.
It would also help to find someone who has been in your shoes. The real life experience can save you headaches, time, and legal fees.
*** Clarify the Method of Payment ***
Many deals go south because one party thought payment would be in cash, while the other believed it would be in interest. Another fall back is not providing details of what the price is based upon.
Provide a clear understanding of what is being sold, whether it’s stocks or assets.
*** Clarity Always Wins ***
Many times there will be a party that drafts a document that’s vague. The party will assume that the finer details can be discussed along the way. This comes from the fear of believing too much information will cause them to be “married” to the deal.
If you are clear up front with as many details as possible, changes can always be made. This is the true benefit of the nature of this document.