GRAND RAPIDS – Two entrepreneurs discuss the initial concepts of a business transaction. At this stage of the game, investment bankers or business consultants may be involved to provide advice on transaction issues. As the discussions progress, the business appetites of the entrepreneurs kick in ? the deal has potential value to both sides and is gaining traction. As deal momentum and goodwill build, the parties decide that it is time to get something short of an agreement in writing ? a Letter of Intent (LOI).

While they don?t want to commit too much, they want to show that they are serious. All of the parties are familiar with a LOI or a memorandum of understanding, that is used to accomplish the desired purpose and each of them has a form LOI which was used on a prior, albeit remarkably different, transaction. The parties move forward to get something, anything, in writing, even without the assistance of professional advisors. They revise one of the form LOIs to suit their needs and everyone signs on the dotted line. However, without obtaining expert counsel, the parties may have created as many problems as have been solved with the LOI.

This article briefly discusses some key purposes of LOIs and key LOI strategies which can save time and money down the road and which can facilitate transaction negotiations and document drafting. A knowledgeable business person, working in tandem with an attorney, may be the best approach to obtain a better LOI.

Some Key Purposes of the LOI:

To state the broad business terms.

To convince third party lenders to take a more serious look at a deal for financing.

To ?lock up? the deal for a period of time and ensure confidentiality.

To start the due diligence process.

To provide a detailed framework for subsequent negotiations and drafting.

Some Key LOI Strategies

BE CLEAR, CONCISE AND PRECISE ABOUT THE BUSINESS TERMS ? Terms which capture price, deal structure, earnouts, financing, contingent payments and the like must be stated as clearly and in as few words as possible so that the broader world could understand what the deal is. Terms of art and terms that only industry insiders would understand, when used, should be dumbed down so that the lawyers and others can grasp what is intended. Assume that the LOI is going to be read by someone who has very little specialized knowledge about the industry at issue and who was not present during the LOI discussions.

DO NOT RELY EXCLUSIVELY ON PRIOR FORMS ? Every deal is different and the starting document needs to be carefully checked. Also, not all forms are created equal—some are very, very good and some are very, very bad—the unwary could start from a point of no return and not even know it.

PROTECT YOURSELF- Make sure that most of the LOI is expressly non-binding. Without question, the LOI should expressly state the portions of it which are nonbinding in at least one place. Of course, to the extent that the LOI is to be broken down into binding and nonbinding sections (which is advisable in most circumstances), this should be clearly delineated to make sure that a court doesn?t arrive at a contrary result.

PROTECT YOURSELF AGAIN – Make sure that there are plenty of outs ? even though the bulk of the LOI should be non-binding, it is always a good idea, especially if you are the buyer in an acquisition context, to allow yourself due diligence, financing, board approval and any other discretionary or non-discretionary outs as may be appropriate.

DO SOME OF THE HEAVY LIFTING NOW ? Issues that can take many hours to negotiate later in a deal can be resolved more quickly and with more favorable results in the LOI phase. For some reason, parties are more sensible at this stage and are more willing to fairly address big questions. No items should be considered out of reach.

SOME THINGS SHOULD BE BINDING- Use binding provisions to suit your needs. Parties typically should expect to have binding ?no-shop? provisions (provisions which prohibit the parties from dealing with others for a period of time), confidentiality provisions and provisions related to the payment of transaction expenses.

GET INPUT?To the extent that it is feasible from cost and confidentiality perspectives, internal and external accounting and tax personnel, legal counsel, key business operators and anyone else who can add value should have the opportunity to provide comments to the LOI.

LOIs are critical documents which, when prepared properly, can provide great advantages in the later stages of transactions and can save the parties time, money and effort. Unfortunately, quite often, LOIs are sloppily drafted in the heat of the moment and many of the critical advantages that LOIs present are lost. In some circumstances LOIs actually create legal and/or business problems for the parties. Accordingly, LOIs should be carefully structured, drafted and, when possible, reviewed by appropriate professionals before execution.

This article was written by Tony Barnes, an attorney with Law Weathers & Richardson, PC. To contact Barnes, telephone (616) 459-1171 or by email him at [email protected]