Formalizing Your Deal Through a Letter of Intent
A letter of intent (LOI) is a formalized (and typically non-binding) offer used by a potential buyer of a business or a potential commercial real estate tenant to lay out the business points of a potential deal between two parties. These are really agreements to agree, and either party can usually walk away if they are not satisfied with the final deal documents.
Of course, the devil is in the details, and you should be sure before signing a LOI that it is non-binding and is simply a framework for a future negotiation, and you are not committing to anything prematurely. In some deals, there may be breakup fees or other binding commitments, which can be appropriate, provided it makes business sense and you understand what you are agreeing to. If you are unsure, don’t sign anything until your business attorney reviews it with you.
Real Estate Letters of Intent (LOI)
It is common practice in the commercial real estate world for a potential tenant to write a LOI to the landlord to try and get an agreement on the big picture business terms of a potential commercial lease. Some of the key components that are typically covered in a Real Estate LOI are:
- Base Rent
- Any Renewal Terms
- What will the Space be Used for (the “Use Clause)
- Exclusivity (“we want to be the only gym in the center, etc.)
- Personal Guarantee Limits
- If a franchise, the Franchisor’s requirements
There are two schools of thought on the LOI. Some real estate professionals like to use a “Short Form LOI” and some like to use a “Long Form LOI.”
Short Form LOI
This is a very basic LOI, spelling out the rent, the term and perhaps a half a dozen or so key terms. The goal here is to get the landlord to agree to the big picture and to save most of the negotiation of the terms for the lease. The advantage here is it is easier to get the short term LOI agreed to; however, the disadvantage is many short term LOI deals never make it to the finish line because many terms are not yet addressed and/or agreed to.
Long Form LOI
The long form LOI approach is to get most of the negotiation out of the way up front, so when the final legal documents are drawn up, the key deal points are already agreed on between the parties. The advantage to this approach is that the final negotiation, at least theoretically, will go quicker and be smoother as the principals will have already agreed to most of the deal. The downside to this approach is that it is much harder to get the LOI agreed to, and the document is most likely still non-binding. In addition, if the principals have not engaged an attorney, many issues might not have been thoroughly covered or thoroughly understood by one of the parties and will end up being re-negotiated or at lease re-discussed in the final deal negotiations.
Business Acquisition LOI
Just like a real estate lease LOI, a business acquisition LOI is a non-binding agreement on the key deal terms moving the deal forward toward a final deal documents. The advantage of using an LOI is that before the parties spend lots of money on detailed due diligence, legal advice, etc. the basic structure has been agreed to by the parties. Some key components to a business acquisition LOI should include:
- The Purchase Price
- The Terms (notes, earnouts, etc.)
- A Proposed Closing Date
- Contingencies to Closing (financing, due diligence, third-party consents)
- The Seller’s Non-Compete Terms
- An Exclusive Negotiating Period for the Buyer
Every deal is different and each LOI for a business acquisition will be drafted match the deal specifics; however, the basic concept of an LOI is the same. It’s an agreement to agree on the basic deal terms to be finalized by the professional. It’s a “written” handshake, signifying that a deal is going to happen absent some unforeseen event or unmet contingency.
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Your work is outstanding!!! Angela and I really appreciate your communication skills, sense of urgency and efficiency. We will absolutely refer you to anyone looking for legal services. Also, the buyer plans to reach out to you next time as they were very impressed.
We have drafted, advised and convert hundreds of real estate and business acquisition LOIs into final deals over the years. We would love to have a conversation with you to discuss your specific deal and see what we can do to finalize and formalize your next step as a business owner. Please call 215-525-1165 to speak to an experienced attorney for a free initial conversation on your deal.