24 Jul Do You Need an Attorney for Your LOI?
John, a successful owner of a family-run manufacturing business valued at $20 million, finally decides to sell. After years of hard work and dedication, he receives an attractive offer from a larger competitor. Excited about the potential deal, John rushes to sign the Letter of Intent (LOI). John believes the LOI is just a preliminary step with no serious legal implications so he doesn’t consult with an experienced M&A attorney. “Once we need the final agreement drafted, that is when I’ll need an attorney,” he thinks to himself. But as the sale process progresses, John finds himself trapped in unfavorable terms, facing unexpected liabilities and restrictive clauses that threaten to derail the entire transaction.
This common but avoidable mistake underscores the critical importance of involving your attorney at the LOI stage, not after it is signed. Here’s why:
The Importance of Early Legal Involvement
A Letter of Intent, while non-binding in many respects, sets the tone and framework for the entire transaction. It outlines key deal terms, including price, structure, timelines, and contingencies. Despite its preliminary nature, the LOI can include binding provisions such as exclusivity, confidentiality, and break-up fees, which can have significant legal and financial repercussions. Here are common errors selling business owners make when signing their LOI without an attorney’s guidance:
1. Misunderstanding Binding Provisions: Many owners assume the LOI is entirely non-binding. However, certain sections, like exclusivity and confidentiality clauses, are often binding and can limit your ability to negotiate with other potential buyers or expose you to legal liabilities if breached.
2. Unclear Deal Terms: Without legal expertise, sellers might agree to vague or overly broad terms that can be interpreted unfavorably later on. For example, agreeing to “market terms” without a clear definition can lead to disputes and unfavorable conditions down the line.
3. Lack of Contingencies: Sellers might neglect to include essential contingencies, such as financing approval, regulatory clearances, or satisfactory due diligence. This oversight can leave you vulnerable if these conditions are not met.
4. Inadequate Due Diligence Timeline: Setting unrealistic deadlines for due diligence or not specifying the scope of due diligence can put undue pressure on you and potentially allow the buyer to renegotiate terms or withdraw from the deal capriciously.
How Legal Advice at the LOI Stage Protects Your Interests
Involving an experienced mergers and acquisitions attorney early in the process can help you navigate these pitfalls and protect your interests. Here’s how:
1. Clarifying Binding Provisions: Your attorney can help you understand which parts of the LOI are binding and negotiate favorable terms, ensuring you’re not inadvertently restricted or exposed to unnecessary risk.
2. Defining Clear Terms: An attorney will ensure that the LOI includes clear, specific terms that protect your interests and provide a solid foundation for the final agreement. This clarity helps prevent future disputes and misunderstandings.
3. Including Essential Contingencies: Your attorney will make sure that all necessary contingencies are included, such as financing, regulatory approvals, and satisfactory due diligence. These provisions protect you if certain conditions are not met.
4. Setting Realistic Timelines: Legal counsel can help you set realistic deadlines for due diligence and other critical milestones, reducing pressure and ensuring a thorough review process.
A Call to Action
Don’t let excitement and haste jeopardize the value you’ve built over years of hard work. Protect yourself and your business by involving a skilled mergers and acquisitions attorney at the earliest stages of the transaction. Take control of your business’s future and ensure a smooth, successful sale. Schedule a 15-minute phone consultation with us today.
