Receiving a Letter of Intent or Indication of Interest (LOI) from a prospective buyer often brings a sense of excitement and validation for a business owner because it signals that all the hard work, sacrifices, and dedication poured into building the business have captured the attention of a serious buyer. This pivotal moment, however, may also be accompanied by a feeling of immense pressure. Buyers often frame the LOI as a time-sensitive offer, urging the business owner to sign quickly to “keep things moving forward.” This pressure, combined with the seemingly straightforward LOI and the advertisement of certain terms as “non-binding,” can tempt a business owner to act impulsively--signing and returning the LOI before discussing the LOI with legal counsel.
While an LOI may appear to be a preliminary and informal step, signing it without consulting a lawyer can lead to unintended consequences and missed opportunities for negotiation.
Here's why business owners should seek legal advice before agreeing to an LOI.
An Attorney Can Explain the Proposed Terms
Every LOI is a strategic document designed to protect the buyer’s interests while enticing the seller. For example, the LOI may propose a lower-than-appears purchase price with illusory value, aggressive exclusivity periods, or vague language around critical deal terms. While some of these terms will be binding (e.g., exclusivity), most terms (e.g., price) are advertised as nonbinding. An experienced corporate attorney can evaluate the LOI, explain its terms in plain language, and help assess whether such terms are fair and align with market norms and the seller's goals. This insight is essential for business owners to make informed decisions and mitigate the risk of committing to unfavorable terms.
Sellers Have Greater Leverage Before Signing an LOI
Buyers understand that they are competing amongst themselves to identify and acquire the best targets, investing tremendous time and effort to identify such targets. It follows that after a buyer has identified a target, there is a sense of urgency to prevent competing bidders from scooping the deal. Accordingly, sellers have significant leverage before signing an LOI, especially if it includes an exclusivity provision. After an LOI is signed, the balance of power may shift in favor of buyers because the seller will have anchored themselves to terms as well as some degree of exclusivity and confidentiality around the deal terms. An attorney can help a seller negotiate when they have the most leverage and protect their future leverage by fine-tuning the LOI to reflect the seller’s interests and ensuring the seller retains flexibility throughout the process.
An Attorney Can Help Negotiate the Proposed Terms
Many business owners assume that LOIs are standard documents that cannot be altered or negotiated. Attorneys know this is far from true. An LOI is often just the first formal exchange in a negotiation process, a process in which serious buyers will be open to some pushback. An attorney can help business owners negotiate key terms to better reflect the seller’s needs and priorities and to get more “market” terms. For example, an attorney can negotiate the scope of due diligence, the length of buyer’s exclusivity period, any proposed adjustments to the purchase price, and the target signing and closing dates. Negotiating such provisions during the LOI stage can and prevent disputes later in the process and may result in a more seller-friendly definitive sale agreement.
Although an LOI’s non-binding provisions may seem inconsequential, they serve as an anchor point for future negotiations, even if you bring in an attorney later in the process. For instance, it is not uncommon for a buyer to rebuff later efforts by seller’s newly engaged attorney to negotiate terms in the purchase agreement where they conflict with the terms in the LOI, referencing the LOI’s buyer-friendly terms. Similarly, the parties may not raise concerns regarding an LOI’s vague language regarding deal structure and payment terms, only to discover that as such terms are negotiated in the definitive deal documents (and at greater expense) there is a gulf between the parties’ positions that cannot be bridged, and the purported deal either falls apart or seller feels like they must acquiesce to buyer’s earlier demands that were agreed to in the LOI as “non-binding. By engaging legal counsel to help with carefully reviewing and negotiating even non-binding terms, business owners can ensure they enter the next phase of the sale process with a framework that is more likely to result in a consummated deal on better terms for them.
Conclusion
The LOI is far more than a casual expression of a buyer’s intent—it is a pivotal document that sets the tone for the entire sale process. By consulting a lawyer before signing an LOI, business owners can protect their interests, ensure the reasonableness of proposed terms, and secure a stronger position for future negotiations. In doing so, they can move forward with confidence, knowing they are well-prepared to achieve a successful and profitable transaction.
Accordingly, sellers have significant leverage before signing an LOI, especially if it includes an exclusivity provision. After an LOI is signed, the balance of power may shift in favor of buyers because the seller will have anchored themselves to terms as well as some degree of exclusivity and confidentiality around the deal terms. An attorney can help.
