A good letter of intent will cover at least all of the following:
- Purchase price, key assumptions, financing and payment terms, including any portion of the purchase price that is contingent on future events (i.e., “earn-outs”) and any portion of the purchase price that is “seller-financed.”
- Transaction structure.
- Applicable purchase price adjustments, and how they’re calculated.
- Escrow and holdbacks, which represent dollars set aside for a specified period of time after closing to protect against post-closing losses of the buyer.
- Indemnification limits, such as caps, baskets, and survival periods.
- Post-closing arrangements, such as employment agreements, non-competition agreements, “rolled” equity, leases, etc.
- Exclusivity periods.
- Obligations relating to due diligence and confidentiality.
- Conditions to closing.
It’s also important to make totally clear that the right portions of the letter of intent are “non-binding” and that the right portions are “binding.”
The letter of intent represents a critical juncture in a transaction and the parties’ respective negotiation leverage. As such, it’s extremely important that you engage experienced counsel to make sure you get the most out of your letter of intent.