You may call it a Letter of Intent (the “LOI”), Expression of Intent or even a Memorandum of Understanding, either way it is often the first significant step of negotiations between parties to a potential sale. It also presupposes that some basic and preliminary level of communication has occurred between parties to reach to this important first step.
This LOI may actually move from the seller of a business to indicate its interest in selling. However, it is more common to see the buyer issue such LOI to the seller with an interest to buy. In some exceptional circumstances, the parties may together ink a document called an MOU to signify each other’s indication or intent.
An LOI usually forms the parameters for the parties to engage in some form of a relationship with an intent to sell or buy or at least to work at that to make a formal offer. It also forms the basis for the seller to assist the buyer in undertaking its due diligence, which is a crucial step to make an offer or propose a sale and purchase agreement.
By whatever name it may be identified as, such document has a unique position. It falls somewhere in between two extremes. On one extreme is the intent and on the other is the signed, sealed and delivered sale and purchase agreement. The LOI forms the conduit between the two extremes. To an extent, it lends a degree of momentum to the process of reaching a deal. It also creates an enabling environment to take the discussions forward.
Generally, an LOI is a very short document that contains the very basic terms of an offer upon which a more formal and more detailed sale and purchase agreement could be crafted.
Although an LOI is not generally legally binding and is often made subject to a sale and purchase agreement, it still lends great clarity and credibility to the process and parties. It outlines the; basis for them working together; the basic terms of the deal; and the pathway to a binding and final transaction.
An LOI is not a legally binding contract like a sale and purchase agreement. It is in fact a nonbinding arrangement between the parties. However, it is quite common to find two important clauses that may be made legally binding in an LOI. One relates to exclusivity and the other to confidentiality.
Exclusivity simply means that the seller shall refrain from making further offers to other potential buyers or entertaining other offers until a decision is made under the LOI or until a certain time has lapsed.
Confidentiality refers to the fact that the buyer shall only use the information gained from the seller on the business entirely to make a decision on purchasing and not for any other purposes.
Rest of the document is largely non-binding and acts only as a way forward.