Three Mistakes Business Owners Make When Signing a Letter of Intent

By: Elliott Stapleton

You’ve worked hard to build a business.

Now you’ve received what appears to be a great offer to sell. The offer is presented in the form of a Letter of Intent and is a very enticing number.

What should you do?

Well, the first thing you should do is contact your legal counsel. If you don’t have counsel, find someone licensed in your state who has experience with an Asset Purchase Agreement or Stock Purchase Agreement.

Unfortunately, not everyone thinks to find legal counsel, and they simply sign the document. The following article includes three mistakes business owners make when they don’t have legal counsel advising on a Letter of Intent.

  1. Believing everything is “non-binding.”

The Letter of Intent says “non-binding” (which means it’s not a contract and either side could back out without repercussions), so what is the harm in signing?

In most cases, a Letter of Intent will be, at least in part, non-binding on both parties. This non-binding statement is typically at the beginning of the document.

Relying on the “non-binding” statement is problematic for two reasons:

  1. If you read on, you will likely see there are legally binding provisions (meaning it is a contract and there are repercussions for breach). For example, a buyer will typically ask that you do not negotiate with any third party until a certain termination date or event.
  2. The Letter of Intent is a framework for the eventual purchase agreement. If you are a seller, and you sign a document provided by the buyer with the key terms, only to later ask for completely different terms, which are not agreeable to the buyer, then you would have wasted a lot more time and resources revising a purchase agreement as opposed to working out those items in the initial Letter of Intent. In some cases, there are broken deal costs allocated if a party is not negotiating in good faith in the Purchase Agreement; thus, you could end up paying the legal and due diligence costs for the buyer.
  1. We signed a Non-disclosure Agreement… I think?

Business owners are typically very good at what they do; they are knowledgeable and work hard in their specific area of expertise. It is surprising, but there are business owners who would hand over very sensitive details to a third party without having legal counsel prepare a non-disclosure agreement. And by legal counsel, I don’t mean counsel for the buyer or a document from a business broker.

Most business owners don’t realize that it is possible for a potential buyer to come in, provide a Letter of Intent, receive your records (including employee records – more on this below), and then make an assessment that they can do it cheaper on their own and don’t have to purchase your company. Without a solid non-disclosure agreement, it may be possible for the buyer to then solicit your best customers with the knowledge of exactly what prices you are offering.

  1. Wait, they can hire my employees?

Business owners may have a very strong bond with their employees. This might have been built over many years of working together. Unfortunately, if the deal does not go through, it might be possible for the buyer to start a competing company in your area and hire your key employees.

You might have a strong relationship with the employees, but what would happen if the competitor can double their salary (because it now knows what the employee makes).

Unless you have solid employment agreements with non-compete and non-solicitation provisions, a potential buyer could assess your company and decide it only needs to take your top three salespeople to put you out of business.

For more information, feel free to contact Elliott Stapleton regarding your letter of intent or for other business or personal asset protection planning.

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