LOI Breakdown: Navigating Binding Agreements
When selling a business, many founders might not know about the Letter of Intent (LOI) or Indication of Interest (IOI) process. Kirk Michie explains the key points of LOIs and why it's important to understand them before signing.
Key Highlights:
Non-Binding Nature with Binding Elements: Broadly, a Letter of Intent is non-binding, but it contains binding portions such as exclusivity agreements. This means that while the overall LOI may not legally bind the parties to complete the transaction, specific clauses within it do hold legal weight.
Exclusivity Period: LOIs often include an exclusivity period, typically around 90 days, during which the seller cannot negotiate with other possible buyers. This window can vary but is vital in making sure that both buyer and seller commit to the due diligence process.
Limited Remedies for Sellers: Once an LOI is signed, the seller has limited options if they wish to back out. They must either negotiate the termination of the LOI with the buyer or wait until the exclusivity period ends before considering other offers or walking away from the deal.
Importance of Certainty: Given the binding nature of certain LOI terms, it's vital for sellers to be very clear about the terms and the involved parties before signing. This foresight helps avoid complications if any doubts or issues arise during the due diligence phase.
Unique Terms in the Context of Selling a Business
Letter of Intent (LOI): A preliminary agreement outlining the terms and conditions under which a buyer intends to purchase a seller’s business. While often non-binding, it includes binding elements like exclusivity and confidentiality clauses.
Exclusivity Period: A set timeframe during which the seller agrees not to engage with other possible buyers. This period of time allows the buyer to conduct thorough due diligence without competition.
Due Diligence: This is the process of checking and evaluating a business before buying it. It includes looking at financial statements, legal responsibilities, and other important areas to make sure there are no hidden problems.
Understanding the details of a Letter of Intent (LOI) is crucial for founders who want to sell their business. The LOI might look like an early step, but its binding parts can affect how the selling process goes. Sellers should carefully review and be sure about the terms before signing to avoid any unexpected problems later on.
