Most transactions involving the purchase and sale of a business start with negotiations between the buyer and seller and end with a formal binding contract. In between these steps, the parties often exchange preliminary draft versions of the major deal points through letters of intent (“LOI”) or memoranda of understanding (“MOUs”). Because most LOIs and MOUs are non-binding, business people do not always put enough time and effort into making sure all important terms are included. They mistakenly believe that the time to address the detailed terms is when they negotiate the final, binding agreement. However, a detailed letter of intent which addresses all of the material terms provides a road map to a favorable outcome and helps avoid hurdles which arise in finalizing the binding contract.
Although MOUs and LOIs are normally non-binding, they contain the major deal points of the transaction and they are signed by the parties. Because they are signed, the parties to a transaction will be hard pressed to renege on terms when it comes to negotiating the final agreement. For example, if the LOI contains a term that says that certain assets will be excluded from the sale, it would be difficult for the buyer to insist that such assets be included later down the line (at least not without additional compensation). Thus, it is very important to make sure all material terms of the transaction are included in an LOI or MOU, even if the other side is not technically bound by such terms.