Is Your Toronto Business For Sale? What You Need To Know About Letters Of Intent
The very first document that is negotiated between the parties in a transaction – such as the purchase of a business – is often a letter of intent (LOI).
While many business owners treat LOIs as a quick first step, there’s good reason to pay much more attention to them.
That’s because – as the seller of a business – once you sign an LOI, you lose significant bargaining power. And unless you take appropriate precautions, this may put the value of the business you worked so hard to build at risk.
What is a letter of intent?
An LOI is preliminary in nature, and sets out in brief the agreement of the parties on key business terms of the proposed transaction.
Why have an LOI in the first place?
The purpose of an LOI is to ensure that the parties agree on price and other key terms before they invest significant time, resources, and legal fees in pursuing the acquisition…
And before the seller agrees to grant exclusivity to the buyer. (More on this important point below.)
An LOI also helps the deal move forward as the parties negotiate more formal and complete agreements, which may ultimately culminate in an agreement of purchase and sale.
Are the terms of an LOI binding?
An LOI is generally non-legally binding, with the exception of some non-business terms that create limited obligations, such as expenses, confidentiality, and exclusivity covenants.
How exactly do sellers lose their leverage when they sign an LOI?
Many sellers think that an LOI is just about the purchase price and how it’s paid.
That’s likely why they sign them without the benefit of legal counsel reviewing them.
But consider this scenario:
Let’s say you agree to the purchase price in your LOI, leaving other terms to be dealt with later on.
Well, those terms will likely be more beneficial to the buyer. And if you have already settled on price, you can no longer use it as a bargaining chip by, say, asking the buyer to pay more for those favourable terms.
What’s more, LOIs almost always include “no shop” or exclusivity provisions. These prevent you from having discussions with other potential buyers while the prospective buyer engages in due diligence.
The fact is, many prospective buyers take advantage of this exclusive negotiating period by prolonging it for several months to decrease their offer price and negotiate for better terms. They know the longer they tie you up, the more committed you become to them.
What can you do to protect the value of your business?
#1. Have a business lawyer draft or review the LOI before you sign it.
Getting legal advice early on in negotiations is more efficient and effective in the long-run. You will save time, money, and avoid legal trappings.
#2. Negotiate down the due diligence period.
Most buyers ask for between 60 to 90 days. Try to negotiate this down to 30 to 45 days.
#3. Be up front with the buyer.
It is best to disclose any risks or unfavourable legal or accounting information about your business to the acquirer before signing the LOI. This way, the buyer knows what they’re getting into.
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Anton M. Katz, Barrister & Solicitor has 22 years of corporate law and commercial litigation experience.
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