What’s the Point of a Non-Binding Term Sheet or Letter of Intent?

You may have wondered, what’s the point of a non-binding term sheet or letter of intent?  After all, you want to move ahead with the deal, and you definitely spend enough on attorneys’ fees that you don’t want to needlessly add to that bill – why not just proceed with the “definitive documents?”  What possible benefit could there be to a non-binding document?

The answer is more pragmatic than you might think.  The point of a non-binding term sheet or letter of intent is actually to save you time and money.  Here are several ways that it does so: 

  • The non-binding term sheet is a relatively straightforward and direct way of determining at an early stage and for a minimal investment whether the deal you are considering is likely to proceed.  Is there a general “meeting of the minds?”
  • It lays out the most important deal terms and allows the parties to determine what the biggest challenges will be and where the “pressure points” will be in negotiations.
  • It forces the parties to identify those issues that might be “deal killers” sooner rather than later – after all, if the deal isn’t going to proceed, better to know early rather than late.
  • As a related matter, it identifies collateral issues/requirements that might not otherwise be apparent – e.g., the need enter into employment agreements with key employees or acquire key assets that are not owned by the target company but are critical to the deal.
  • It often signals the commencement of high level due diligence – while additional due diligence is almost always required, negotiation of the term sheet/LOI generally requires the exchange of some basic information by and regarding each party.
  • Although non-binding in most respects, the term sheet/LOI often includes certain binding terms that may be important, including:

o       Confidentiality – allows the parties to exchange meaningful information without fear that it will be misused or disseminated.

o       Exclusivity – allows the parties to negotiate without interference from competitors.

o       No-Shop – protects the buyer from the seller using the buyer’s offer to locate or drive up competing offers.

o       Break-Up Fee – sometimes included where the parties are reasonably confident the deal will proceed and the cost of due diligence, etc. will be high.

  • Finally, it accomplishes all of the foregoing before the clients spend valuable time, and the lawyers spend costly hours, on the finer points of the overall transaction – this saves money whether the deal proceeds or not.

The bottom line is a non-binding term sheet/LOI often has value.  You should consider using one in your next substantial business transaction.

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