Understanding Letters of Intent: What They Are and Why They Matter

While most LOIs are non-binding, not involving an attorney at this stage could create unforced errors that could complicate later negotiations. A skilled attorney can help business owners and brokers utilize the power of an LOI to their advantage by (1) maximizing their client’s bargaining power in the transaction, (2) negotiating favorable exclusivity provisions, and (3) protecting their client’s sensitive business information from adverse uses. Critchfield attorneys are uniquely skilled in working with business owners to make these consequential, business-minded decisions, and you will feel the value provided by a Critchfield attorney at every step of your transaction.

Maximizing Bargaining Power

Sellers often have more leverage before signing an LOI and can use this leverage to draft a detailed and preferential LOI that outlines the material terms and conditions, as well as clear timelines for key milestones of the deal. A detailed LOI helps the seller put their best foot forward, screen out unsuitable buyers from the deal, and avoid re-trading with the buyer in the purchase agreement. Conversely, buyers have more leverage the further the deal progresses and therefore benefit more from a less detailed LOI early on and negotiating a definitive purchase agreement later. A less detailed LOI allows the buyer to negotiate better terms once an exclusivity provision binds the seller and may enable the buyer to re-trade the deal for a reduced price should issues arise during due diligence. For buyers and sellers alike, it is vital to have experienced legal counsel who can offer guidance and negotiation skills to enhance their clients’ negotiating power and minimize the overall risk of the deal.

Negotiating a Favorable Exclusivity Period

An LOI often contains an exclusivity provision prohibiting the seller from soliciting or negotiating with other potential buyers for a specified period. Exclusivity provisions work in the buyer’s favor, protecting the time and resources they invest in the transaction from the risk of bids from other buyers or the seller walking away entirely. To strike a proper balance between the interests of both parties, the length of the exclusivity period is crucial. For example, if the period is too long, a seller may not have the opportunity to speak with more favorable buyers. Conversely, if the period is too short, a buyer may not have sufficient time to complete negotiations or thorough due diligence, leaving them vulnerable if the seller backs out or sells to another buyer. Critchfield attorneys often play a vital role in helping clients negotiate balanced exclusivity terms that protect their clients’ positions and ensure a fair, strategic approach to the transaction, which often reduces friction points in the LOI and beyond.

Protecting Sensitive Business Information

The exchange of sensitive business information, such as financial records, proprietary data, customer lists, trade secrets, employee information, or strategic plans, is a necessary part of any merger or acquisition. Sellers are especially vulnerable; without proper legal safeguards, a buyer may have the ability to misuse this information—intentionally or unintentionally—by targeting the seller’s customers, poaching key employees, or leveraging competitive insights for their benefit, especially if the deal falls through. To protect this information, the parties need to execute an LOI or a separate binding agreement with strong confidentiality and non-disclosure provisions before exchanging any sensitive information. An experienced attorney can ensure the LOI includes explicit, enforceable confidentiality and non-disclosure provisions that outline the protected information, prohibited uses, and the penalties for breach. Retaining legal counsel early in the process not only helps safeguard their client’s sensitive business information throughout the entire process but may also help avoid costly litigation in the future.

How Critchfield Can Help

While drafting a favorable Letter of Intent that also protects your rights may seem complex, a Critchfield attorney can help you maximize your bargaining power while minimizing your exposure to risk during and after the transaction. Critchfield attorneys are highly skilled in every detail of mergers and acquisitions and can help you make the most of your LOI without the premium of a larger firm. We strongly recommend contacting our office before negotiating a Letter of Intent, so you can enter your transaction with the confidence that a Critchfield attorney can provide.

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