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Bound By a Letter of Intent?

Typically, the buyer’s first step in any acquisition is to draft an acquisition letter of intent stating the desired purchase terms. Such letters can be highly useful in avoiding lengthy preliminary negotiations and clarifying goals and constraints. They can be contracts or not, and may be binding as to some included matters but not binding as to other matters.

A letter of intent to acquire can easily become a contract, even unintentionally. The exchange of any consideration, including money or mutual promises, is enough to create an enforceable contract. For that reason, if you do not wish your letter of intent to be a contract, the best practice is to insert language into the letter that specifically disclaims any intent to create a contract and that the term sheet is not binding.

Often, both parties will want certain parts of the term sheet to be binding. To accomplish this, a statement that certain sections are binding and others are not—naming the binding sections—can be inserted into the term sheet. A common binding part of an intent letter is a confidentiality provision. For obvious reasons, one or both parties will want to keep the terms private between the parties. In that case, the letter may be drafted to indicate that the parties promise to each other to keep all information within secret and not to entertain other buyers for a specified period of time while a fully binding purchase agreement is negotiated and executed.

The parties may also desire to make negotiating rights exclusive for a fixed period. Obtaining exclusive rights to negotiate with a business owner over the target company gives a buyer much needed breathing room to appropriately research the target and discuss terms. Thus, details about the exclusivity arrangement may be a buyer’s primary goal at the initial stage. Without the security of exclusivity, the buyer may end up being just one of many potential buyers, and suffer from the added pressure and distraction of competing voices and demands on the target company, frustrating the buyer’s goals.

Other areas in which the parties may desire to bind one another include allocation of responsibility for expenses, and dispute resolution terms. Retaining a qualified attorney is your best move to ensure that your acquisition letter of intent does exactly the things that you want without creating unwanted liability.


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