Letters of Intent: The Basics


James R. Walczak is partner at MacDonald Illig Attorneys. He concentrates his practice in the areas of corporate governance, business transactions and finance, and creditors’ rights. He acts in the capacity of general counsel for a number of business, nonprofit and governmental organizations, providing legal advice on corporate, transactional and tax matters.

There are several steps in the sale or purchase of a business. Once the parties have agreed upon the essential terms of the transaction, the first step should be a well thought-out and carefully drafted letter of intent (“LOI”).

An LOI signifies that the parties are serious about concluding a transaction. It sets forth the principal terms, conditions and contingencies applicable to the transaction. It establishes the process for moving forward, the expected timeline for consummating the transaction, and the obligations which will be binding upon the parties during the process of negotiating a definitive agreement.

LOIs are often characterized as “nonbinding.” This label is misleading. Virtually every LOI contains some “binding” provisions. And the LOI is the keystone upon which the final, definitive agreement will be built. In short, “non-binding” does not mean “not important!”

Four Parts of an LOI
An LOI generally consists of four parts: 1) a preamble; 2) non-binding provisions; 3) binding provisions; and 4) a conclusion.

The preamble should identify the parties and the nature of the transaction. It should clearly indicate that the LOI is intended to be non-binding, except for those provisions that are identified as binding. It should expressly state that neither party is obligated to proceed with the transaction until there is an executed definitive agreement, which is satisfactory to each party, in each party’s sole discretion.

The non-binding provisions should cover the essentials of the transaction and any other items that the parties think to be particularly important. Common nonbinding provisions include: 1) the legal structure of the transaction (stock sale vs. asset sale); 2) included and excluded assets; 3) price and price adjustment mechanisms, such as working capital adjustments; and 4) payment terms, including amounts to be escrowed. Any other elements that the parties deem to be critical should be included in the non-binding provisions.

The binding provisions lay out the expected timeline for negotiating and consummating the transaction and the legally binding obligations of the parties during that process. Common binding provisions include: 1) the due diligence process and limitations thereon; 2) “no shop” obligation (seller will not seek or entertain other offers while the LOI remains in effect); 3) confidentiality, including the existence of the LOI and ongoing negotiations; 4) the conditions/process for termination of the LOI; 5) obligations surviving termination; 6) who has the obligation to pay expenses; and 7) governing law. Other binding provisions, which are also seen, include:
1) limitations/prohibitions on the ability of the buyer to contact employees, customers and suppliers of the seller; and 2) limitations
of liability for any breach of the binding provisions of the LOI.

The final part of an LOI should be a simple conclusion, which reiterates that the LOI is non-binding (except for those provisions identified as binding), and that neither party shall have any obligation to proceed with the transaction until the parties have agreed upon and executed a mutually satisfactory definitive agreement.

Lastly, the LOI should have a place for the other party to accept and sign the LOI. The LOI also should indicate a date when the offer of the LOI will terminate if it is not accepted.

Overall, it must be remembered that, legally, an LOI is a contract. Accordingly, it has both important legal and non-legal ramifications. It should always be prepared in consultation with legal counsel.

It must likewise be remembered that an LOI is critical to the satisfactory negotiation and consummation of a transaction. The time and effort taken to “do it right” almost always pays off in the end in a big way.

For more information, contact James Walczak at or 814/870-7763.