what is letter of intent in a business term?

Answer 1

What Is the Letter of Intent (LOI) or Term Sheet?

It is a confidential document, usually prepared by the buyer or investor, which outlines in general terms the purchase or investment agreement between the parties. All of the following are the same thing: term sheet, memorandum of understanding (MOU), letter of intent (LOI), heads of agreement, deal points, etc.

Most of the time it is not a legally binding commitment to buy, sell, or invest. However, certain provisions such as confidentiality stand still and payment of consultants during the diligence period should be and usually are binding. I refer to the LOI as a “handshake in writing".

The main purpose is to assure that the parties agree on the general terms of the deal before starting due diligence. Without the terms written, the parties will expose themselves to crucial ambiguities and omissions.

What Is Covered?

It should identify and confirm agreement on all significant issues of the potential transaction. The following is my basic checklist:

· What’s being sold? Is it a stock sale, an asset sale, or equity interest? What specific items are included are included or excluded?

· The price including security instruments and other money issues. This defines all consideration that will potentially change hands as a result of the transaction. This includes, purchase price, investment capital, consulting agreements, non-compete agreements, employment agreements, royalty agreements earn-outs and any other such agreement.

· Terms. Will it be all cash at closing or will there be financing. The LOI also describes what security agreements are to be created for any future payments. If there is third party financing ahead of seller financing, The LOI should include the seller’s right to approve such financing and establish a date for a financing commitment to be in place from the third party.

· The payment provisions. These define how and when the payments take place.

· The allocation of the price to the various layers of the deal. (For example, what is the value of the Non-Compete Agreement and how much of the purchase price is allocated to it.) This is often postponed until later with the proviso that the parties will agree to allocations such as to minimize taxes on the deal. Putting off is bad. Since tax issues that benefit one party many hurt the other, later negotiation is not a good deal. I insist with my clients that allocations are agreed on up front and included in the LOI.

Allocation is key to minimizing taxes and should be reviewed with your accountant and financial planner prior to signing the LOI.

· A definition of what is being sold and what is not. List the categories of items. A good place to start is the current balance sheet and list exceptions or add-ons as appropriate.

· Work to be done by consultants and advisors before a Definitive Agreement is signed and who pays for that work. Many times the buyer and sell will spend significant sums during the due diligence period on outside advisors.

· Definition of which party is responsible for drafting the Definitive Agreement. In my experience, the buyer or investor’s lawyer usually does this. The LOI should have a target date for the completion of the definitive.

Answer 2

A letter of intent is an agreement between two companies or people to buy a business or to go in on a venture together. It used to be called a gentlemen's agreement. There are law websites that tell you about them. I know you have to be careful of them in terns of wording and what the objectives or outcomes are.