Purchase and Sale Agreements
Once the key terms to a transaction have been agree upon, documents can begin to be drafted.
Letters of Intent
In larger transactions, it is customary to have a letter of intent. In it, the parties put down their basic agreement. Usually the agreement states that there is no binding agreement between the parties, except as to particular items, such as the confidentiality of information given to the buyer by the seller, until a definitive agreement is signed.
Although the extent, nature, and details of the non-binding matters covered in a letter of intent will vary depending upon the needs of the transaction, there are a number of matters that are so material that they appear in almost every letter of intent. These include:
- the price (how much, in what form (i.e., whether in cash, notes, or stock)) and when it will be paid (i.e., at closing or on some deferred basis);
- the structure of the transaction (i.e., merger, asset purchase, or stock purchase); and
- various conditions to the closing and other provisions.
Proponents of letters of intent state that they are important because neither side wants to invest more money in a transaction until the parties have agreed on the basic terms. It protects the parties by making sure they agree on the key points. Usually, the expectation is that these key points can no longer be negotiated once they are in the letter of intent. Probably the biggest reason for doing a letter of intent is that if the parties cannot agree on one, they have not had a true meeting of the minds, and so will not be able to agree on the form of a definitive purchase agreement.
Critics of letters of intent consider them a waste of time. The parties should go on to preparation and signature of the definitive purchase agreement without this extra hurdle. They ask how anyone can set the key point - the price - until after the due diligence is completed.