A Letter of Intent (LOI) summarizes the terms of a potential agreement between a buyer and a seller during a New Jersey business acquisition. As the name implies, it expresses one party’s intention to do business with another before drafting and signing a legal agreement. LOIs can also signify the buying party’s seriousness to engage in the transaction.
In this article, a New Jersey business lawyer addresses how an LOI works, what it should contain, and where to get legal advice.
Purpose of an LOI
The first step of business acquisitions in New Jersey is to obtain an LOI from the prospective buyer. An LOI is essentially an official declaration that one business wants to discuss the possibility of doing business with another party. While the document may contain numerous non-binding provisions, it may also contain binding provisions that should indicate a serious commitment on the part of the parties, particularly the buyer.
It also serves several important purposes, including:
- Purpose 1. Defines the primary transaction structure
- Purpose 2. Creates a record of preliminary negotiations
- Purpose 3. Emphasizes critical points for due diligence
- Purpose 4. Outlines the seller’s post-closing role in the business
- Purpose 5. Promotes the buyer’s acquisition of financing from a lender
What Should a Letter of Intent Contain?
There are many ways to write an LOI, depending on the nature of the transaction. While there is no definitively correct way, a few critical components should be included.
Consider incorporating the following provisions in company LOIs:
- Provision 1. State of Purpose: This provision describes the document’s purpose. It also identifies parties the date on which the document becomes effective. The statement of purpose establishes the nature of the business transaction as a merger, acquisition, or joint venture.
- Provision 2. Contingencies: Business acquisitions are subject to many contingencies that govern how the negotiations proceed. Both the buyer and seller can provide a list of critical contingencies. Contingencies generally include buyer financing, interviewing key employees, on-site visits, and contract drafting.
- Provision 3. Due diligence: Conduct a thorough business appraisal to ascertain the existence of any undeclared assets or unknown liabilities. This process could include conducting background checks, verifying financial records, and validating legal documents.
- Provision 4. Timelines: Include specific timelines for current and future negotiations. Each party should establish deadlines to ensure that the negotiations proceed predictably.
While the letter of intent is not a “binding” document, it is still a contract with potentially binding provisions. The parties may agree to include binding conditions in the LOI, such as limitations on the sharing or using information obtained during the negotiations for unrelated purposes.
This Securities and Exchange Commission (SEC) page offers a sample LOI.
What to Do After Receiving an LOI Proposing a New Jersey Business Acquisition
After receiving a Letter of Intent, thoroughly review it with a New Jersey business attorney and make any necessary amendments before returning it to the prospective buyer. The buyer may accept or reject the modifications and return them. While an LOI is not a legally binding document, it lays the groundwork for constructive and fruitful business negotiations, which requires added due diligence measures.
Get Legal Help from L.P. Taylor Law Today
The legal team at L.P. Taylor Law can help businesses navigate the complexities of business acquisitions in New Jersey. Learn more about how our N.J. legal services can help by calling (914) 977-4343 or messaging us directly via the contact form below.