Originally posted on 7/24/22, content updated on 1/11/24

Here is the scenario – you have been discussing the sale of your business with third parties for many months, if not years, and finally, one or two investors stand out above all the rest and are ready to take the next step – offer you a letter of intent. You are now faced with the tug of war on letters of intent. On the one hand, the letter of intent should be negotiated and signed quickly so that the deal moves on to its crucial and final stages. On the other hand, care needs to be taken to make sure that the letter of intent expresses the agreement on major structural, business and legal issues.

Sellers are naturally often anxious to sign a letter of intent so as to not squander an opportunity which looks better than the seller ever imagined.  But sellers need to keep two things in mind. First, most investors view a signed letter of intent as setting the major business terms in stone, subject to the investor’s opportunity to conduct due diligence and adjust the purchase price if the investor believes its analysis calls for that. Once these major business terms are solidified, it is difficult to renegotiate them later. So, although letters of intent are generally not binding (see more on this below), the seller needs to take time to ensure that the letter of intent identifies and resolves the major structural issues in a manner that is satisfactory to the seller.

Second, although letters of intent are almost always non-binding, they do contain binding sentences on specific subjects, including, a) a no-shop, or exclusivity, agreement, which prohibits the seller from seeking or negotiating with other investors for a designated period of time; b) a confidentiality provision; and c) a procedure for the letter of intent to be terminated. The purposes of these binding clauses are, 1) to ensure the investor that, while it expends time, money and resources investigating the seller, the seller will operate ordinarily and not seek to negotiate against the investor, and, 2) to provide the seller with comfort that its willingness to sell its business will remain confidential and that there will be a date to move on if the parties cannot come to terms on a definitive agreement.

So, when you receive the “golden ticket” from an investor, keep in mind the tug of war that should occur to finalize the letter of intent.