Letter of Intent or Heads of Term?

Once the buyer and seller have agreed some terms in principle between them it is quite usual for the buyer and seller to then instruct lawyers to draft some heads of term or letter of intent before full blown legal, accounting due-diligence takes place. The term heads of term or letter of intent is used interchangeably but they both mean the same and importantly have the same desired effect. For the purposes of this article I shall refer to this document as the letter of intent.

The letter of intent (binding or non-binding – explained below) will set out the key points that are agreed between the buyer and seller. The key points will include, but not be limited to, whether or not it is a share sale or asset sale.

If it is a share sale then, purchase price, how the purchase price will be calculated and paid, any retention amount, what the time frames of the transaction are, disclosure of information, announcements and confidentiality, period of exclusivity granted to review the information provided and conclude the transaction etc.

If it is an asset purchase then, purchase price, how the purchase price will be calculated and paid, any retention amount, what the time frames of the transaction are, disclosure of information, announcements and confidentiality, period of exclusivity granted to review the information provided and conclude the transaction etc, what assets are being sold/ transferred, what the liabilities are and how these will be discharged or assumed at completion.

With regards to whether or not the letter of intent is binding or not you need to consider the following. A binding letter of intent will, as the name suggests, ‘bind’ or obligate the parties to carry out and complete the purchase once certain conditions as stipulated in the letter of intent have been met and the documents set out in the letter of intent have been agreed and finalised. In contrast, a non-binding letter of intent does not obligate the parties to complete the purchase, it merely acts as an expression of the buyer’s interest to want to buy the assets or shares (as the case may be).

It is quite often the case that letters of intent are drafted with some terms/ clauses being binding and others being non-binding so you do need to be careful.

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