LOI is the acronym used to abbreviate the term “letter of intent” or, in Spanish, “Letter of Intent”.

A LOI It is a document that establishes the bases for the formulation of a definitive agreement between two or more parties.

In the world of business buying and selling, the use of the LOI as a means to make the parties define the route to follow in the framework of the negotiations. The traditional steps that lead to the closing of a purchase-sale transaction of a business between Buyer and Seller are chronologically the following:

  1. The Buyer receives the preliminary information of the business for sale
  2. The Buyer signs the confidentiality agreement
  3. The Buyer receives detailed information about the business
  4. Seller and Buyer meet
  5. The Buyer presents the LOI To the seller
  6. The Seller accepts the terms of the negotiation
  7. The Buyer inspects the business (Due Diligence)
  8. The Buyer agrees with the “due diligence” done
  9. The Lawyer prepares the purchase-sale contract
  10. Buyer and Seller sign the contract
  11. The Buyer honors the price and the Seller hands over the business.

As we see, the LOI It is the document that, once accepted by the parties, triggers the formal process of the sale, even though the LOI is generally non-binding in all of its statements.

Usually the terms of the negotiation related to price, forms of payment and guarantees are not binding, but the confidentiality agreement, the rules of negotiating in good faith, and the provision to keep the business off the market during the inspection process, if they are.

Some elements that are usually included in the LOI are the following:

  1. Price and method of payment
  2. Transaction structure:
    • purchase of assets;
    • purchase of shares; either
    • a merger
  3. Expected timeline for due diligence” and the negotiation of the purchase-sale contract.
  4. Exclusivity period for the potential buyer
  5. Access to the seller's employees, books and records during the “due diligence.”
  6. Confidentiality and non-disclosure obligations.
  7. Seller employees who will remain and remuneration formulas
  8. Agreement that obliges the Seller not to compete.
  9. Term for the acceptance and duration of the LOI
  10. Jurisdiction of the courts and applicable laws in case of disputes

Since the Buyer is the one who prepares the LOI, he will always try to "bring the coal closer to his sardines" by presenting a brief version that includes a period of exclusivity long enough to thoroughly analyze all the details of the business and put his financial position in order in the meantime.

A LOI short and concise usually favors the Buyer while saving him the legal expenses of drafting a more detailed text.

Furthermore, when thedue diligence” is executed in depth, it is very likely that the Buyer will detect some inconsistencies that will allow him to renegotiate the acquisition value and the terms of payment of the business.

The Seller, for his part, is in the interest of the text of the LOI come as specific as possible because once you accept the LOI, he must take his business off the market and wait until the Buyer has completed the inspection process. So, the more explicit the preliminary agreements reached with the Buyer are expressed, the easier it will be to draw up the final purchase-sale contract.

La LOI, to summarize, is convenient when you want to “put in black and white” a verbal agreement and set a critical path of actions that will eventually lead the parties to the closing of the purchase-sale transaction.

The essential elements that would cover the LOI would be referred to the confidentiality in relation to the information exchanged; the procedures to carry out thedue diligence” and the period of exclusivity in which the parties will not be able to inquire about substitute businesses or alternate buyers.

La LOI it is not often used in operations involving small businesses whose selling price is, say, less than US$5,000,000.

In these cases, the generally accepted practice is to use a sufficiently comprehensive purchase option that is converted, after the “due diligence”, in the purchase-sale contract.

As our readers will notice, writing a LOI it is not subject to formalities or predetermined texts. However, despite its non-binding nature, the LOI it must reflect the seriousness of the parties in negotiating the sale in good faith so that it is not just a prospecting instrument for the Buyer or a formula for the Seller to “tempt” the market.

La LOI It must be, in essence, a well-structured, clear and concise platform that allows the parties to slide comfortably and without wasting time towards the closing of a successful operation. As the Spaniards would say, a way to keep “clear beads and thick chocolate…”

Author: Alfredo González / www.negociosenflorida.com

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