The Stages in Buying and Selling a Company, Part 1

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Stage 3: The Pre-Acquisition Outlining of Initial Terms

Letter of Intent: A basic, typically non-binding document outlining the initial structure and terms of a future sale. Also called a Memorandum of Understanding (MOU); an Indication of Interest (IOI); a Term Sheet; or, in the UK, a Heads of Agreement.

Before any transaction is actually consummated, the Buyer’s and Seller’s early-stage discussions are often outlined in the preparation of a document called a Letter of Intent (“LOI”).

Most LOI provisions are typically not legally binding, and include:

  • General details on Structure (i.e., Stock vs. Asset Sale, and, if the latter, a general description of the assets being sold);
  • Key Deal Terms (such as price, form of payment, etc.);
  • General terms outlining the scope and nature of Due Diligence; and
  • the expected Closing Date.

The purpose behind including such non-binding terms is to outline the parties’ initial intentions with respect to terms of the proposed transaction.

However, a couple of notable LOI provisions that typically are legally binding include:

  • Confidentiality Clauses; and
  • “No-shop” Clauses

Confidentiality Clauses protect the Seller’s proprietary information during the Due Diligence document exchange process.

“No-shop” Clauses often restrict both parties’ ability to make a deal with others for a set time period.

It’s best to reach agreement on as many of the general LOI deal terms as possible. If the parties can’t agree, in general, on the important terms of a deal at this stage, it may make no sense to proceed to the next phase — the drafting of the Purchase Agreement.

In the next article, we’ll discuss Stage 4 – the Purchase Agreement.

Related articles:

Eli Mendoza on Equity and Financing

Moving on Up Through Mergers and Acquisitions

Small Business Growth Through M&A