A Letter of Intent, or term sheet, outlines the basic terms of a business deal, making sure the parties understand generally what it will look like and forcing them to think through what the deal breakers are. It doesn’t do anyone any good to start drafting a purchase contract if the parties don’t even know what the terms of the deal are going to be—that’s like starting to pour the foundation of a new home before knowing what the floor plan will be or how many bedrooms the owner wants. When done properly, a Letter of Intent provides a detailed roadmap for the parties, and can save lots of time, effort, and money as the process moves forward.
Letters of Intent can be used for all types of transactions—employment agreements, the purchase and sale of a business or other large asset, in anticipation of a lease, etc.
An effective Letter of Intent will also generally be non-binding. In other words, the parties merely agree that any contract they decide to sign in the future (but are not bound to sign) should contain the terms laid out in the Letter.
One exception to this is that often purchasers of a business will require that the Letter of Intent contain a binding “no-shop” provision, which prohibits the seller from entertaining other offers while the purchase contract is being written. This ensures the buyer that it will not have the rug yanked out from underneath it in the meantime.
If you are starting the process of negotiating a business deal, give us a call so we can help you think about what your Letter of Intent should look like, and what types of terms you should be sure to include in the negotiation process.