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Letters of Intent

Many business owners or entrepreneurs interested in buying or selling a business enterprise are often unsure of where to start once the target buyer or seller has been identified.  Since many of these negotiations are complex and can take months, if not years, to conclude, a very useful and efficient tool to start the negotiations is the Letter of Intent.

A Letter of Intent is a preliminary agreement between the parties (often accompanied by a non-disclosure agreement) which sets forth the basic terms of the anticipated transaction so that the basic framework of the deal can be agreed to before substantial time and money is expended by either or both parties.  Careful attention must be paid to the terms of these Letters of Intent, as courts have held that they can be binding legal agreements.

Letters of Intent should include, at a minimum, the following basic terms:

  • Structure of the transaction (asset purchase, merger, etc.)
  • Purchase price and payment of purchase price (cash/promissory note/stock)
  • Earn out payments
  • Due diligence terms
  • Time frame
  • Extensiveness
  • Limitations
  • Specific representations or warranties (financial, environmental, etc.)
  • Any specific conditions precedent (financing, agreements with key management, necessary approvals, etc.)
  • Confidentiality provisions (if not addressed in a separate agreement)
  • Exclusivity period
  • Duty to negotiate in good faith

The preparer of the Letter of Intent must be careful to specifically identify which provisions are or are not binding on the parties.  This is important since one of the key factors that Illinois courts will consider in determining if a Letter of Intent is or is not binding is whether the terms of the Letter itself were ambiguous.  If the court finds that the terms were unclear, then the court will look to extrinsic evidence to determine the parties’ intent.

Carefully drafted by knowledgeable legal counsel, a Letter of Intent can be an extremely useful and efficient vehicle for moving a transaction from the negotiation stage to the closing stage while protecting both parties.