Letters of Intent

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“The bad things you can see with one eye closed. But keep both eyes wide open for the little things. Little things mark the great dividing line between success and failure.”
Jacob Braude, Author and Humorist (1896-1970)

In business, an eyes wide open approach is essential to the successful purchase of a private company. When the purchaser of a private company enters into a letter of intent (“LOI”) or reaches a handshake deal to buy a private business, the little things often have not yet been fully disclosed and it therefore remains to be seen whether the transaction will fail or succeed. This post reviews focuses on little things that a private company buyer should make sure to address to achieve an optimal outcome, including steps to be taken after the parties have signed the LOI.

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Little Thing No. 1: Conduct Adequate Due Diligence

Due diligence, in the context of mergers and acquisitions, is commonly referred to as the process by which the buyer gathers information about the business or the assets for sale. It is crucial for a buyer to conduct sufficient due diligence to establish the following information, a minimum, before closing on the purchase:

Confirm the seller has the authority to sell the stock or assets of the target company;

  • Identify and investigate potential liabilities or risks;
  • Identify necessary steps to integrate the target business into existing business; and
  • Identify any obstacles to closing the transaction, such as shareholder consents, third-party consents, or prohibitions on transfer.

Establishing this information requires the buyer to review the seller’s organizational documents, such as formation documents, bylaws or operating agreements, benefit plans, vendor contracts, supply contracts, and customer contracts. Some of the common issues the buyer will need to focus on are: (i) ownership of the target company, (ii) existing management of the company, and (iii) necessary consents from third-parties in connection with key contracts.
Continue Reading Buyer Beware: Purchase a Private Company With Both Eyes Wide Open

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In Edgar Allan Poe’s short story, the Purloined Letter, his fictional sleuth, C. Auguste Dupin, successfully located a stolen letter the thief had cleverly concealed by hiding it in plain sight.  In the legal world, letters of intent (LOIs) are used to form partnerships, raise funds, and add investors, among other things, but the common use and non-binding character of LOIs does not mean they are problem free.  This post takes a look at LOIs and focuses on issues that may be overlooked, but which can create significant legal problems in the use of LOIs.

Letters of intent are referred to by many different names, including memoranda of understanding, term sheets, agreement in principles.  Whatever it may be called, an LOI is simply a summary description of the essential terms of a business transaction.  In most cases, the parties intend that the LOI will be non-binding and will not establish an enforceable agreement between them except as to one or two provisions, such as confidentiality and exclusivity.  Due to the non-binding nature of LOIs, and the fact they “have no teeth,” business owners and investors may conclude there is no need for or value in retaining legal counsel to negotiate and draft LOIs.    This common sense assessment, however, actually reflects a risky business strategy.  Whether the proposed transaction involves the start up of a new company or the investment in an existing business, hiring an experienced business lawyer to assist is a wise, cost-effective decision.
Continue Reading Hiding in Plain Sight: Often Overlooked Problems with Letters of Intent