The purchase and sale of a business generally begins with a letter of intent. A letter of intent comes into play after what can be designated the “handshake stage.” The importance of these non-binding letters cannot be understated because it is the first evidence of what the parties ostensibly agreed to. Letters of intent have the advantage of clarifying the terms of the transaction for all parties, identifying issues for the parties, and setting forth certain binding terms. These letters vary considerably in style and substance depending on the nature of a proposed transaction. As between small unsophisticated parties a letter can be relatively short and simple, omitting many of the complexities addressed in a transaction between large corporations.
It is rare to see a letter of intent that is completely non-binding or binding in every respect. Most letters of intent contain both binding and non-binding provisions. This allows flexibility for negotiating substantive elements while maintaining security for the proposed venture. Non-binding provisions will be those germane to the substance of the transaction i.e. price, structure of the transaction, and the various conditions to closing. Binding provisions will usually address the conduct of the parties during the course of the transaction. Binding provisions usually include the seller granting to the buyer access to information so it can perform adequate due diligence, the parties’ obligations to keep information confidential, the seller’s promise not to shop for a better deal, and the parties’ promise to negotiate in good faith.
In the event the parties do not wish to assume the risk that a letter of intent will be construed as binding in a court of law they may elect to use a term sheet. A term sheet is a short summary document that will include the basic terms and conditions of the proposed transaction.