Drafting a Letter of Intent: Do I Need Counsel?

There are real advantages to negotiating a well-crafted letter of intent with the assistance of experienced M&A lawyers.

Man and woman in meeting

Those selling or buying businesses can best position themselves to close the deal by engaging counsel early in the process. Often, efforts to save costs at the beginning of a transaction result in additional expense later or can even cause the deal to fall apart. A solid letter of intent creates a strong foundation and provides significant financial benefits and favorable risk allocations in any M&A transaction.

What is the significance of a letter of intent?

Letters of intent, also known as “term sheets,” “memoranda of understanding,” or “LOI’s,” are key components of any well-structured M&A transaction. They not only set forth material terms in one or the other party’s best interests, but also serve to clarify important details of the deal. In addition, they afford the parties an opportunity to structure the transaction at the outset in a tax-advantaged manner.

We often advise our clients that, whether they are contemplating buying or selling a business, it is best to get experienced counsel engaged early in that process in order for the client to receive the full benefits of a well-drafted, favorable LOI. Having counsel involved at the outset serves the dual purpose of getting terms inserted that benefit the party from the very beginning and providing a clear “road map” for drafting and reviewing the definitive deal documents.

While LOI’s are often thought of as non-binding, the reality of deal negotiations is that both sides will point to the LOI for the controlling terms, noting both what is in the LOI as well as what is not in the LOI. Valuable opportunities to include protections such as setoff rights can be lost by not negotiating at the LOI stage, with the presumption being that items not negotiated at that stage were never intended for inclusion. Setoff rights provide just one example of many potential lost opportunities.

Why should I seek assistance from M&A attorneys?

Many buyers default to forms found on the internet or books about buying or selling a business to prepare their own LOI without counsel. While those forms may provide a better alternative than bespoke drafting by a non-lawyer, they will never be tailored to your needs and your transaction. M&A is a highly specialized field where knowledge of what is to come is often more important at the LOI stage than what is actually known. Experienced M&A lawyers are able to predict what negotiations will need to occur based on a proposed deal structure and to best position the client at that early stage.

Often, buyers think that they can save money by not involving counsel at the LOI stage, but the reality is that money spent at the LOI stage is money saved on protracted (and potentially failed) negotiations over protections, unclear terms, or risk allocations not put in place. As a buyer, you will have the very most power in the transaction at the offer stage, and your opportunity to garner the greatest advantage will be lost if your LOI is not well negotiated at that stage.

As a seller, it is important to realize and understand the impact of each and every item written into an LOI presented to you. Like the buyer, if you fail to exclude provisions unfavorable to you at the LOI stage, the buyer will point to that LOI as the memorialization of the deal, and negotiating away from a written agreement made at the LOI stage may therefore be nearly impossible. Inexperienced sellers (don’t feel bad — most are!) may not know what some LOI terms mean or what their impact may be. Seemingly innocuous insertions may be costly when the time comes to draft and negotiate the definitive documents.

Regardless of whether you are the buyer or seller in a proposed M&A transaction, your best chance to gain an advantage in the deal is early, and your best protection and advantage are gained by having counsel involved at that time. Some buyers and sellers are inclined to skip the LOI stage altogether, often also in an effort to reduce costs, but not having an LOI can, in some cases, be even worse than having a poorly drafted LOI. In this case, salient terms of the deal are never memorialized, allowing deals to fall apart later in the process and wasting legal fees, resources, and time when negotiations with a viable seller or buyer could be happening.

Pittsburgh Corporate Attorneys

Our Corporate Team is experienced in assisting clients through a wide variety of M&A transactions, structuring, negotiating, and closing deals in diverse industries around the world, starting at the letter of intent to best position their clients for success. Please reach out to us by phone at 724-776-8000 or complete our contact form to schedule a consultation.

This entry was posted in Corporate, Legal Watch and tagged , , , , , , , . Bookmark the permalink.