Letters of Intent (or LOIs) are like getting engaged before you get married. For business transactions, LOIs reflect the major terms of the parties and the intent to enter into a full agreement after further negotiations. But why go through the process of getting married if you can’t even get engaged? So lets discuss the terms of engagement.
Types of LOIs
There are two types if LOIs: binding and non binding letters of intent.
Nonbinding LOIs are perfect for getting to know one another. Why enter into a nonbinding LOI? So that the parties know at least they are on the same page (pun intended) for the major terms of the parties potential relationship. If you can’t see eye-to-eye on some basic terms, the parties shouldn’t waste each others’ time negotiating a full agreement.
Binding LOIs are great if you need to get the terms down for the comfort of the parties while they put together a full agreement.
LOIs may be used for:
- real estate transactions,
- business acquisitions,
- sales of commodities,
- new partners in a business,
- employment opportunities,
- and just about any other agreements.
A quick story
A serial entrepreneur was recently interested in buying into a newer construction company that was lacking in capital funds to survive. But he had capital and an interesting investing. New businesses are always risky, and especially if that business has already run out of capital. However, he saw hope as they had landed a large bid and needed capital to take it on. Without completing this large bid, the company would surely go under. He also saw that he could help this company better manage their funds in the future.
The entrepreneur had a few options on how to invest in the company. He could contribute the amount as a “capital contribution”, but he would not have a guaranteed return on this new bid the company had landed. The company could not afford to pay him salary for his services either. So he decided that it was best that he loan the company the funds with a guaranteed return and secured by the assets of the company. However, he would be able to gain his equity percentage through his management services as a capital contribution.
This certainly had a couple moving parts that needed to be set in contracts. And these terms were the only way this entrepreneur would put his funds towards this company, but the bid was approaching quickly. He was hesitant to spend the legal fees drafting up the Loan, Security Agreement, and Subscription Agreement if they would not even accept these terms. As such, we drafted a LOI (which cost much less to draft) to take to the company. Thankfully he did just have a LOI, because the company had some great ideas on structuring the deal differently that made all the parties feel more comfortable. This saved legal fees and was less intimidating for the parties to review and negotiate.
If you think a LOI could help your deal or want to know more about what options you have. Call us at 219-230-3600 or email at [email protected]