The First Step In A Big Deal: The Letter Of Intent
Buying or selling a business, raising capital or investing in a start-up, or negotiating a make-or-break contract are all situations where participants often draft a letter of intent prior to a formal contract. Drafting a letter of intent, or “LOI,” is a prudent step, setting out the major terms in black and white, cutting off futile negotiations, helping a deal move forward, and even reducing legal fees. It is cheaper for attorneys to hammer out the fine print in a 50-page agreement if all the material terms are agreed upon and summarized in a two-page letter.
An LOI establishes the framework for an extraordinary—possibly life-altering—transaction, but since an LOI is “preliminary” in nature, parties will often draft and sign them without input from legal counsel. Legal advice is more effective and efficient at the earliest stage in negotiations. Good lawyers address the hazards on the road ahead without killing a deal. Any subsequent attempts to modify terms based upon tax issues (real money) can be as difficult as changing the purchase price.
After the execution of an LOI, questions may arise over the legal obligations the parties owe to each other. Disputes over LOIs are not uncommon. A party to an LOI faces uncertainty over whether they entered a binding agreement and receives a variety of advice from people who have never read their unique letter.