I recommend that letters of intent, and term sheets, that cover all of the major business points concerning the contemplated transaction, be sufficiently detailed.
Because unless there is a fundamental agreement regarding the important business points between or among the parties to the transaction, there is little to no legitimate reason to invest additional time and trouble. Negotiating what is typically a far more detailed definitive purchase agreement and the various ancillary closing documents is unnecessary without a meeting of the minds.
My clients are frustrated when they see a substantial legal bill for a transaction that fails to close, and in light of that reality, and the overall value of everybody's time and attention, I cannot recommend proceeding to the preparation and negotiation of a definitive purchase agreement without a detailed letter of intent or term sheet.
What is the difference between a term sheet and a letter of intent, and why should the parties to the contemplated transaction prefer one to the other?
A term sheet is just that, a sheet which outlines the important business points relative to the contemplated transaction.
A sufficiently detailed term sheet serves the purpose of focusing the parties' attention on the important business terms relative to the contemplated transaction, so, if the parties agree to a term sheet, we have at least confirmed in writing that there is a meeting of the minds between the parties relative to the important business points.
A letter of intent typically includes everything that is contained in the term sheet, and covers two other important bases as well:
- A letter of intent will typically include a confidentiality provision to protect the confidentiality of information. Such a provision may or may not even be needed if a stand-alone confidentiality agreement has already been entered into between the parties which is often the case.
- A letter of intent will also typically contain a "no shop" or exclusivity provision, which is of value to the buyer of the business as it will prevent the seller from negotiating with other parties concerning the possible sale of the business in question for a period of time. This provision is of value to the buyer as it protects the buyer's investment in attempting to negotiate and close the acquisition by preventing the seller from simultaneously entertaining offers or expressions of interest from other parties for the same business.
We cannot overestimate the importance of a detailed term sheet or letter of intent as a first step towards acquiring a business. We prefer a letter of intent to a term sheet for the reasons indicated.