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What Should Go into a Letter of Intent?

To start acquisition talks in earnest, a prospective buyer will generally offer the seller a letter of intent (LOI). The contents of the LOI are generally non-binding except for certain provisions such as a confidentiality or the covenant not to solicit the seller’s employees. The LOI will include the key details of the proposed purchase. The LOI should state the buyer’s proposed purchase price and whether any portion of the purchase price is conditioned on future earnings of the company or subject to any claw back. The LOI should also state if the buyer plans to buy the company’s assets (asset purchase) or shares in the company itself (stock purchase). From the seller’s perspective, it is generally best to put the most critical deal points in the LOI. It is better for the parties to have a meeting of the minds on the biggest issues in the deal rather than kick the can down the road. If a deal is going to fail to close, it is better for the seller to know this as early as possible so he or she can avoid a major investment of time, expenses and emotions only to see the deal fail at the eleventh hour.

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