IMPORTANCE of LETTER OF INTENT
Pre-Acquisition - Letter of Intent - Due Diligence - Share Purchase / Sale - Asset Purchase / Sale - Merger - Equipment
Contact Neufeld Legal for business mergers and acquisitions at 403-400-4092 or Chris@NeufeldLegal.com
Upon establishing a legitimate interest to acquire a particular business, the Letter of Intent (LOI) becomes an instrumental document in the advancement of the business acquisition, which should not be reduced to relying upon a formulaic template. The letter of intent acts as indispensable and often non-binding blueprint that serves to initiate the formal process of a business acquisition, while all too often setting core key parameters for the transaction. The letter of intent initiates the process the parties agree to undertake, defining the commercial framework, managing stakeholder expectations, and setting the trajectory for all subsequent negotiations. Its importance cannot be overstated, as it transitions exploratory discussions into a committed, structured path toward a definitive agreement. By articulating the core economic and structural terms early on, the document ensures that both the buyer and the seller are aligned on the fundamental aspects of the transaction before expending significant resources on detailed due diligence and legal drafting.
A well-drafted letter of intent is essential for establishing and locking in the critical valuation and deal structure elements. This includes defining the purchase price (and its components, such as cash, shares, and/or earnouts), treatment of working capital, and the basic form of the transaction (e.g., share purchase vs. asset purchase). Any ambiguity in these fundamental terms at the letter of intent stage can lead to disputes and potentially derail the transaction later on, often at a time when both parties are heavily invested. A robust letter of intent minimizes this risk by forcing both sides to confront and agree upon the economic realities of the deal upfront, thereby building momentum and commitment that is vital to navigating the complexities of the subsequent phases.
In turn, the letter of intent is instrumental in providing appropriate protections and controls through the inclusion of strategically important binding provisions. Most critical among these is the exclusivity clause, which legally prevents the seller from entertaining competing offers for a defined period, thereby safeguarding the buyer’s time and investment in due diligence. Equally vital are confidentiality and non-disclosure clauses, ensuring sensitive financial and operational data revealed during due diligence remains protected. Without these legally binding guardrails, the risk of information leakage, wasted negotiation efforts, or "deal fatigue" increases significantly, undermining the entire acquisition effort.
As such, a tightly-drafted letter of intent acts as a foundational roadmap and a source of leverage for the acquirer. It dictates the scope and tone of the due diligence process and provides the essential outline for the final, legally complex definitive purchase agreement. A clear, comprehensive letter of intent drastically reduces the time and expense associated with closing the deal by front-loading negotiations on key contentious issues. Ultimately, its true importance lies in its ability to instill confidence, maintain momentum, and act as a powerful tool for converting a tentative agreement in principle into a successful, closed transaction.
When it comes to the legal component of corporate mergers & acquisitions, that is when our law firm comes into play. Such that when your business is seeking knowledgeable and experienced legal representation in orchestrating and completing business mergers, acquisitions and divestitures, we are capable of providing such strategic legal advice and direction. Contact our law firm at Chris@NeufeldLegal.com or 403-400-4092 to schedule a confidential initial consultation for advancing your business' transactional objectives.