Letter of Intent

By Jack Lyons, Mergers & Acquisitions Advisor and Certified Exit Planning Advisor (CEPA)

In mergers & acquisitions, a Letter of Intent is a very important document because, when it is signed, it spells out the preliminary agreement between a buyer and a seller. Simply stated, a Letter of Intent is a nonbinding document that outlines the key business terms the parties have agreed to, which will later become the basis for and part of the Definitive Purchase Agreement and other agreements and documents that memorialize a business sale. Letters of Intent vary in length and specificity. Sometimes they are called term sheets, but no matter what they are called, Letters of Intent should spell out the major deal points, deliverables, timelines and contingencies that become the basis for the legally binding agreements.

A Letter of Intent serves many purposes besides documenting the business deal, including the following:

  • Serving as a record of the progress of the initial negotiations
  • Identifying items that need resolution in order to reach a preliminary agreement prior to due diligence
  • Defining (often) a “no shop” provision or standstill period during which the seller is precluded from negotiating with other parties
  • Minimizing the waste of time and money by both parties, because if they cannot reach agreement on the key terms and conditions of the transaction in the letter, there is almost zero probability of negotiating the other definitive documents
  • Acting as the basis for the buyer obtaining financing from a lender
  • Defining time frames and deadlines so that the transaction can move toward a closing in a predictable manner, even though delays and extensions are common in merger & acquisition transactions due to the need for third-party consents, renegotiation of terms, the magnitude of work involved in gathering due diligence materials and supporting schedule information for the definitive agreement, or for other reasons

At a minimum, a Letter of Intent should address the following so that there is no misunderstanding between the buyer and seller at a later date:

The Parties to and the Type of Transaction

These should be spelled out clearly. Who is the buyer? Who is the seller? What is the form of purchase (Asset, Stock, Recapitalization, Merger, etc.)? What is being purchased and what is being excluded (are all assets, liabilities and debts part of the purchase, or are specific assets, liabilities and debts part of the purchase)? How are these assets, liabilities and debts defined (cash; accounts receivable; inventory; furniture; machinery; customer and employee lists; seller's right, title and interest in the office lease and other contracts; trade names and trademarks; accounts payable; accrued payroll and payroll taxes; and capital lease obligations)? Which party is responsible for paying off bank loans?

What is the total purchase price? How much will be paid at closing? What is the method of payment (cash, the buyer’s stock, note, stock options, earn-out)? If other than cash or stock payable at closing, when and how will the other payments be made? Will part of the purchase price be retained by the buyer to secure representations, warranties and indemnifications? If so, how much and for how long? If the purchase price is adjustable based on finalized earnings or balance sheet deliverables (e.g., working capital peg), how will any adjustment be calculated?


Confidentiality AgreementsWhat is the agreement between the parties as to if and how long the seller will be employed by the buyer? What will be the initial salary, bonus, benefits, vacation days, etc.? If there is to be a bonus, how will it be determined? Will the salary be guaranteed? Are there termination obligations as far as salary continuation and benefits? What are the terms of the noncompete agreement?

Transaction Contingencies and Conditions

Must the seller meet any thresholds to receive the purchase price? Is the transaction subject to the satisfactory completion of due diligence? How will due diligence be scheduled? Is there an “adverse change in the business condition” clause? What is the outside date for execution of the Purchase Agreement and closing? What information is to be considered confidential? Is the transaction subject to board of directors or lender approval? Is approval required by a legislative body? Is there an exclusivity period? If there is to be a press release, when will it be issued, and will what is said be subject to mutual agreement? Who will be responsible for the various costs of completing the transaction, including any audit, brokerage or consulting fees? How will the purchase price be allocated so that each party can understand the tax ramifications of the transaction? Is there an exclusivity period? Can the Letter of Intent be extended if deadlines are not met?

It is important to address all the above-mentioned issues so that there is true understanding between the parties prior to initiation of due diligence and the drafting of the Definitive Agreements, and so that the transaction has the maximum probability of being successfully completed with the minimum of misunderstanding and renegotiation between the parties.

Jack Lyons is a Mergers & Acquisitions Advisor, a Certified Exit Planning Advisor (CEPA) and president of Lyons Solutions, LLC. He can be reached at 203-642-4141 or at jlyons@lyonssolutions.com.

Copyright 2010 Jack Lyons. All Rights Reserved.