Is An LOI A Contract And Does It Bind Any Party

Is An LOI A Contract And Does It Bind Any Party

YouTube link – Let’s look at what an LOI is.  An LOI is short for letter of intent.  It merely communicates the intentions of the parties to proceed with the transaction, this document kick starts the sale process.  So is an LOI a contract and does it bind any party?

It usually contains the terms of the sale, meaning how much is being offered and if there are any seller financing, how much will be deposited at the contract signing, earn outs requested, timeframes of the due diligence, and lease arrangements. 

We at GillAgency try to keep this document as simple as possible, as for the most part it is non-binding for both parties.  Contract is the binding document which comes after the due diligence is satisfactorily completed.  

The LOI should be no longer than 1 or 2 pages. With that said we have seen LOIs with a lot more verbiage that I just discussed. It can be multiple pages with items like confidentiality clauses, no shop clause within a certain time frame while the due diligence is being conducted (this effectively takes the business out of the market) and many other items that may or may not be binding.  

You as the seller should carefully review the LOI if it contains any binding clauses and decide if you want to negotiate them down or move forward with it.  So, to answer the question, some parts of an LOI can be binding.  

You should always consult your attorney and a M&A advisor before signing an LOI that has elements of binding clauses.

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