What should a seller check in a letter of intent before signing?

BDC’s senior counsel says a letter of intent usually consists of just a few pages, but it can be so much more detailed that it can be difficult to tell it from a formal purchase offer. BDC also says that although it is not a binding offer, the letter anchors the transaction terms to some degree. Its own seller guide calls this stage a non-binding offer that outlines the proposed purchase price, key terms and exclusivity period for due diligence. That is a reason to read it closely first. These checks are questions to put to your lawyer, not advice on what to accept.

Questions to put to the letter

• Which clauses are stated to bind? BDC says the letter creates binding obligations on one party or the other where it so provides, particularly on confidentiality and exclusivity. See what a confidentiality clause should cover.
• What is the exclusivity period, and what penalty applies if it is breached? BDC lists both among the clauses a letter may include.
• How is the price described? BDC gives the example of a price range subject to amendment, with the final price determined only once due diligence is completed. Ask what could change it and the terms of payment.
• Which closing conditions does the buyer attach? BDC refers to the usual closing conditions of the transaction, so ask for each condition to be spelled out.
• Who must sign? BDC says it must be signed by the seller, the buyer and the other parties involved, as the case may be.

Getting help with the reading

BDC notes that a valuator’s report can help you evaluate buyers’ offers and bolster your position in negotiating the price or terms. A lawyer can tell you which clauses of your letter bind and what each commits you to. If you feel rushed, see what to do if a buyer pressures you to sign an LOI before you are ready. For penalties, see how break fees work in a letter of intent.