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The Advantage of Creating a Letter of Intent

The Advantage of Creating a Letter of Intent

May 1, 2017Virtus LawNo CommentsCategories: Articles, Business

There are many different transactions that use letters of intent as part of the deal. While the letter of intent will later be replaced with a more detailed contract, it is still important to have an accurate letter of intent that reflects the arrangement of the parties. If inaccurate, a poorly drafted letter of intent can create unintended problems at the outset of a relationship.

For many large business transactions, significant due diligence needs to occur before the transaction can be finalized. This could be an audit and review before the purchase of a business or the passing of tax incentives before the establishment of a manufacturing facility. In both cases, before this work begins, the parties reach an agreement and memorialize it in a letter of intent that covers at least the basics such as the scope of the transaction taking place, the purchase price, the expected results of any outstanding due diligence, and any other key terms.

While there is no law that requires letters of intent for transactions, it is nonetheless good practice to write out what each side’s expectations are from an arrangement. If the transaction is big enough, securing the services of an attorney to help review and draft the letter of intent can be a good first step in starting the process. An attorney can also help make sure the letter of intent is binding, not binding, or only partially binding, depending on the objectives of the parties involved. This helps avoid mistakes that may come from careless drafting.

One major advantage of a letter of intent is that it gives both parties in the project a framework for what is expected to happen. For example, with a real estate purchase, a letter of intent can stipulate that the seller will perform certain inspections and reviews and, if those don’t turn up any significant unexpected problems, then the buyer is committed to buy the property for a certain price. In other words, a letter of intent covers the essential terms and gives the seller the motivation to collect any necessary reports for the buyer in order to complete the deal.

For large transactions where non-lawyer professional negotiators are involved such as a real estate agent, businessman, or site selector, having a letter of intent gives the lawyers guidelines about what details were discussed and what still needs to be finalized. The remaining negotiations are focused on how to resolve smaller issues, follow the schedule laid out in the letter of intent, and often occur after a press release has announced the transaction.

If you’re entering into a business arrangement, once you’ve drawn out how you want the deal to work on the back of a napkin, bring in the experienced team at Virtus Law by calling us at 612.888.1000 or emailing us at info@virtuslaw.com. We can take the outline of your plan and turn it into a letter of intent that is accurate for both parties. Then we can help you negotiate the rest of the details to make sure your deal is a good one for you.

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