A letter of intent is generally the first agreement a buyer and seller agree to and sign in a transaction.  It lays out the key terms of the deal, and for the buyer, it frequently includes a “no-shop” timeframe restricting the seller from selling or shopping the business to another buyer.  For the seller, the letter of intent locks in the buyer and the material terms of the deal.  Some letters of intent are binding and others are non-binding, or contain some binding and some non-binding provisions.

The Arsenal of a Deal Letter of Intent (in Basketball Buckets)

Layups

1. Price: Deal price and earnouts (compensation paid post-closing out of revenue) or adjustments, and payment mechanism (financing, cash, equity, etc.) 
2. Transaction Structure: Equity or asset deal, and if an asset deal, material buckets of excluded liabilities that the buyer does not assume. 
3. Deal Closing Date: Target closing date and potentially a date by which if the deal does not close, the deal is off. 

Mid-Range Jumpers

1. Representations/Warranties: There may be unique representations/warranties negotiated such as if there is a known or potential environmental or hazardous material liability. 
2. Non-Competition & Confidentiality: Period of time post-closing that the seller will not compete with the sold business, including the applicable geographic scope, description of business restricted from competing in, and timeframe.  The scope of a non-compete must be reasonable.  Any seller confidential information must be kept confidential by the buyer and its representatives. 
3. Employment Agreements Post-Closing: Are key employees of the selling company getting an employment agreement to continue working post-closing?
4. Key Covenants & Other Agreements: One example may be each party pays its own deal expenses.  Another could be whether there are any pre-closing conditions such as an important government or client consent that is required to close the deal.  Others could include anything unique to the deal, such as if one party is a public company and whether both parties agree to the content in a press release. 

3 Pointers

No Shop

1. Period of time the seller can’t actively shop or solicit other buyers, potentially subject to various exceptions such as applicable fiduciary duties to maximize stockholder value.
2. The seller may require a break-up fee in exchange for a “no shop” provision pursuant to which the buyer must pay the seller a fee if the deal doesn’t close. 

Indemnification

1. Escrow Amount & Duration: How much of the purchase price is held back and for how long (10% and 2 years?) to cover any post-closing indemnification or liability obligations of the seller?  
2. Basket & Cap: Is there a minimum amount of losses ($200,000 or 1% of the purchase price?) that the buyer must incur post-closing to trigger the seller’s obligation to pay the buyer for post-closing losses?  Is there a maximum amount after which the seller is no longer obligated to pay for any buyer losses after the cap is hit ($2,000,000, or 10% of the purchase price?)?  
3. Applicability: What post-closing losses trigger seller’s obligation to pay for buyer’s post-closing losses?  Are there potential environmental liabilities?  Or just basics like breaches of certain seller representations in the purchase agreement?