You are a prospective buyer and your interest in a business has been piqued after reading the information memorandum. Based on the information in the information memorandum, you have made a proposal(non-binding offer), after which you and the seller have agreed on the outline of the price and conditions. What is the next step?
Both the prospective buyer and seller then often want to move on quickly and start the due diligence process. It regularly happens that at that stage parties underestimate the importance of a good agreement of intent and, with the best of intentions, suffice with a one A4 summary of agreements.
This creates an ideal breeding ground for unpleasant surprises at a later stage, while the main reason for concluding a letter of intent is to avoid unpleasant surprises.
For this reason, it is therefore wise to sign a carefully drafted letter of intent agreement as the next step, after outline terms of the transaction have been agreed upon.
The function of the letter of intent has already been discussed frequently in previous expert contributions. To avoid repetition, I will not discuss it further in this contribution. However, it is wise to dwell on three important points that should be regulated in the letter of intent from the perspective of the prospective buyer.
1. Suspensive conditions
As a prospective buyer, you always want to have the option to abandon the transaction at any time. For example, the outcome of the due diligence may not be satisfactory or you may wish to break off negotiations for other reasons (for example, unexpected negative publicity about the target).
In this case, it is important to temper the seller's expectations when entering into the letter of intent. The prospective buyer can do this by agreeing in the letter of intent which suspensive conditions must be met before the parties can enter into a purchase agreement.
It is also possible to include the conditions under which the parties may withdraw from the negotiations. In this way, the prospective buyer can avoid the seller taking the position that she had a reasonable expectation that a purchase agreement would be reached or that the prospective buyer has an obligation to continue negotiating.
Thus, by including strict conditions in the letter of intent, the prospective buyer can ensure that the formation of the purchase agreement cannot be simply enforced.
2. Exclusivity
A prospective buyer planning to acquire a business will invest a lot of time and incur costs during the process (think of the due diligence). It must be prevented that the seller also talks to other parties in the meantime and, in the worst case scenario, even plays the interested parties off against each other.
Therefore, it is important for the prospective buyer to include an exclusivity clause in the letter of intent. Once that agreement is made, the seller is not allowed to talk to other parties.
The seller will want to tie the exclusivity to a term, so that after that term she is free to speak with other parties. The final length of the exclusivity period is often a matter of negotiation.
3. Agreements about the future
Finally, the post-transaction period must also be considered. Often an open door, but it cannot be the intention of the seller to start a competing business after the transaction or to work for a competitor.
Parties can make specific agreements in the letter of intent in the form of a competition, relationship, and anti-solicitation clause or include the agreement that they will flesh out those clauses in the final purchase agreement.
