Why use a Letter of Intent?
A Letter of Intent is exactly what it says: It is a document, usually a letter from the prospective purchaser to the prospective seller that sets out the intent of the parties.
Frequently Asked Questions
Letter of Intent
Independent Legal Advice (“ILA”) refers to legal advice given by a lawyer who is not involved in the transaction with the client. ILA is usually required by lenders and other sophisticated parties who want to ensure that their clients are fully informed of the content and consequences of a transaction. ILA should be obtained by any person who is self represented and who is involved in a transaction where all, or some, of the parties are represented by the same lawyer.
At a certain stage the purchaser and vendor want to start formalizing the terms of the agreement. Usually, all of the terms of the agreement are not known up front, but the parties want something on paper. This usually happens by the parties agreeing to the material terms of the transaction and the purchaser delivering a letter of intent to the vendor.
Independent Legal Advice must be obtained as early as possible, even before any formal legal steps are started.
The Letter of Intent deals with the following:
- Purchase Price and how it is going to be paid
- What is being purchased
- What will happen form the offer, to the signing of the Letter of Intent, to the Date of Closing, and thereafter
- Arrangements in relation to the take-over of the business, i.e. employees, equipment, inventory, etc.
- The closing date
- Agreement in Principal
- Preliminary Deal
No, a Letter of Intent is not binding. It simply states the intent of the parties and supplies a guideline for the lawyer to prepare the Purchase Agreement.
Realistically, nothing. The Letter of Intent, although it it creates a moral obligation, creates no legal obligation.
A transaction can of course proceed without a Letter of Intent. The terms of the agreement between the parties are usually reflected directly in the Purchase Agreement. This practice does however lead to changes being made to the Purchase Agreement than would normally have been negotiated and agreed at the Letter of Intent stage.
The parties can prepare a Letter of Intent themselves or get the assistance or guidance of a lawyer. Time and money is spent in negotiations and making changes to the transaction on an ongoing basis. There is a cost saving when this is done before lawyers get involved as making changes to the Purchase Agreement as part of negotiations can become costly.