Letters of Intent: Make Sure You Don’t Run Into Trouble
Often, when entering into large business transactions, there are long and complex contracts to be drafted and signed. In many cases, before those documents are even signed, there may need to be some investigation, or due diligence, into financial statements, records, and other information.
But if parties have agreed “in principle” to enter into a transaction, or to at least explore a business transaction, but aren’t ready to sign a full agreement yet, how do they memorialize the rights and understandings of the parties? The answer is the proverbial “letter of intent.”
Letters of Intent
A “letter of intent” (LOI), which is sometimes called an “agreement to agree,” is a short(er) contract, whereby the parties spell out what they want to and intend to do in the future, as far as consummating a business agreement.
Let’s assume that you were going to purchase a business, but did not want to assume any current lawsuits of that business. That provision alone could be an entire page of a full business agreement. So, in the LOI, the parties would just state in plain language that the full agreement will have an exclusion of the assumption of current lawsuits.
Before the full agreement is signed, the parties may need to do further exploration to determine how many lawsuits are outstanding, what the potential liabilities are, how much those suits may affect the business going forward, etc. But for the short term, the parties have a LOI that states what they have agreed to, at least in principle.
Problems Can Arise
LOIs are shorter, briefer, and often vague. As a result, when it comes time to hammer out details in the full agreement, often the parties still aren’t able to close a deal. There are often way more facts, details, legal language, or nuances that were never contemplated at the time the LOI was drafted. And of course, the results of a due diligence investigation may reveal information that eventually makes a party unwilling to enter into a full agreement at all.
You should be careful about drafting LOIs; many people think they’re drafting LOIs, when in fact, they’re actually drafting and signing legally enforceable contracts. Where an agreement sets forth all material terms of an understanding, it’s an enforceable document, no matter what you call it. Many have found themselves bound to an LOI because it was drafted in such a way as to be an agreement–not just an agreement to agree to something else in the future. Don’t use stock samples you find online.
Don’t navigate complex business transactions by yourself. Contact Tampa business attorney David Toback to make sure that you understand what you’re doing and that you’re not getting yourself into trouble without being aware of it.