Getting the LOI Right When Buying or Selling a Business

Buying or selling a business is stressful enough. Getting the Letter of Intent (LOI) right is critical to ensuring a successful business sale or purchase. LOIs typically serve as non-binding terms sheets that outline how the deal will progress, set expectations, and minimize surprises. However, despite being non-binding, LOIs are an essential precursor to a binding contract, which is why it’s crucial to get them right.

Many people make the mistake of waiting until they have an LOI in hand before seeking legal counsel. Unfortunately, this approach can lead to misunderstandings and wasted resources. For instance, one client agreed to pay for half of the legal fees for a deal that ultimately fell through, while another client failed to realize that the closing date was unrealistic. Both of these scenarios could have been avoided by involving legal counsel from the beginning.

In addition to seeking legal advice, there are several other best practices to consider when drafting an LOI. First and foremost, it’s critical to ensure that the LOI accurately reflects the intentions of both parties. This means being transparent about the deal’s structure, including the purchase price, payment terms, and any contingencies.

Second, it’s essential to consider the risks and benefits of the deal for both parties. Ideally, the LOI should be structured in a way that minimizes risk and maximizes benefits for all parties involved.

Finally, it’s crucial to clarify the timeline and conditions for moving forward with the deal. This includes specifying the due diligence process, outlining the timeline for drafting and signing a definitive agreement, and identifying any conditions precedent to closing.

Essentially, an LOI is an essential component of any business sale or purchase. By seeking legal counsel, accurately reflecting both parties’ intentions, considering risks and benefits, and clarifying the timeline and conditions for moving forward, you can set yourself up for a successful transaction.

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