Why Use a Letter of Intent

February 6, 2012 — 1 Comment


We are often asked in our practice, when to use a letter of intent. A Letter of Intent (“LOI”) is a document used between two parties to a transaction to summarize the main terms and conditions that two parties have discussed as part of a transaction. A LOI can either be legally binding an enforceable agreement or a non-binding recap of the negotiated terms so far discussed by the parties. The decision to have the LOI be binding or not is largely based on agreement between the parties based on how serious they are about consummating the transaction. As such, a LOI can be a valuable tool to determine the relative seriousness of the parties in developing a transaction and can be invaluable to assist moving the parties closer to entering into a contract for whatever type of transaction is being consummated.

While the terms which are typically included in a LOI will vary from transaction to transaction there are a few general categories of terms that are typically included as a matter of course. Typically these terms are broken down into two categories: Substantive; and, Procedural. Substantive terms are terms that are specific to the subject matter of the underlying transaction; Procedural terms by contrast are terms that are focused on the who, what, when and where of the transaction.

Some substantive terms that should be included in a LOI are:

  1. The sale price for any goods, services, or assets and the methodology of how the price for these items will be determined between the parties.
  2. If the transaction is for the sale of a business, whether it will be a stock or asset sale.
  3. How payment will be made, including any payment schedule, price adjustment and financing terms that may affect sale price.
  4. Any provisions to protect the Seller in an installment sale, i.e. security interest in the assets being sold, for instance the requirement for the Buyer to sign a personal guarantee or the imposition of a lien on the Buyers home to secure the transaction.
  5. A list of any assets that specifically will not be included in the contemplated transaction.
  6. A list of any liability that will be satisfied as part of the transaction.
  7. A list of any liabilities that will not be satisfied as part of the transaction and the Buyer will be assuming as part of the transaction.
  8. How inventory of the business will be transferred between the parties.
  9. How real estate, including leases, physical plants and storage facilities will be handled.
  10. Provisions detailing any covenants the Buyer will require of the Seller, including if appropriate covenant not to compete.
  11. Any agreement for the Seller to do future work for the Buyer as part of the contemplated transaction: for instance as a consultant or independent contractor. Such provisions should include language regarding

In addition to substantive items there are a number of procedure items which should also be included in the letter of intent

  1. Whether the Buyer or Seller reserves the right to negotiate with other parties or in the alternative whether the parties agree to negotiate exclusively with each other.
  2. A schedule for completing negotiations and a signing date of a finalized contract between the parties.
  3. A list of issues that remain to be negotiated between the parties
  4. A list of any other due diligence items that need to be completed
  5. Where the LOI is binding or non-binding on the parties
  6. Whether the parties will enter into any negative covenants such as non disclosure agreement, non-competes or non-solicitation agreements.
  7. Jeffrey D. Katz Esq. is the founding partner in the law firm JDKatz, P.C. Formerly with KPMG’s Mid Atlantic tax practice, Mr. Katz’s practice focuses on tax, estate planning and real estate matters. Mr. Katz is admitted to practice in the State of Maryland, US Tax Court, US District Courts for Maryland and the District of Columbia, and before the United States Fourth Circuit. Mr. Katz routinely lectures on estate and corporate law issues in Washington, DC and suburban Maryland. Mr. Katz lives in Montgomery County, Maryland. He may be reached at 301-913-2948.

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