In nearly every significant business acquisition, the parties begin with a letter of intent—sometimes called a term sheet or memorandum of understanding. The letter of intent is one of the most misunderstood documents in business law. Business owners often treat it as a mere formality, but an improperly drafted LOI can create binding obligations, derail negotiations, or expose a party to liability for failing to close a transaction that was never meant to be final.
Binding vs. Non-Binding Provisions
A well-drafted letter of intent typically contains a mix of binding and non-binding provisions. The core economic terms—purchase price, structure, and closing conditions—are usually expressed as non-binding, reflecting the parties' intent to negotiate definitive agreements. However, certain provisions are typically binding from the moment the LOI is signed. These commonly include exclusivity (the seller agrees not to negotiate with other buyers for a specified period), confidentiality (both parties agree to protect non-public information), expense allocation (who pays for what during due diligence), and the governing law and dispute resolution provisions.[1]
The distinction between binding and non-binding provisions must be stated explicitly and clearly in the LOI. Courts have found ambiguous letters of intent to create binding obligations on core deal terms, putting parties in the position of being legally committed to transactions they thought were still under negotiation.
The Duty to Negotiate in Good Faith
Even when the substantive terms of an LOI are non-binding, courts in many jurisdictions have recognized an implied duty to negotiate the definitive agreements in good faith. This means that a party who signs an LOI and then refuses to negotiate, imposes unreasonable new conditions, or deliberately obstructs the process may be liable for breach of the implied covenant. The damages in such cases can include the other party's out-of-pocket expenses for due diligence, legal fees, and lost opportunity costs.[2]
Mississippi courts have recognized the duty to negotiate in good faith in the contract formation context, though the scope of this duty in the LOI context has not been extensively litigated. Prudent drafters will address the good faith negotiation obligation directly in the LOI to avoid ambiguity.
Key Terms to Address in the LOI
Beyond the purchase price and deal structure, a comprehensive LOI should address the scope of the due diligence investigation and the timeline for completion, the conditions to closing (financing, regulatory approvals, landlord consents), whether the buyer is assuming liabilities or purchasing only assets, the treatment of employees—particularly key employees whose retention is critical, the form and terms of any seller financing, representations and warranties the seller will be expected to make, and the indemnification framework for post-closing claims.[3]
Addressing these issues in the LOI—even on a non-binding basis—reduces the risk of surprise during the negotiation of the definitive purchase agreement. Parties that skip these issues in the LOI often find that they have fundamental disagreements that could have been identified earlier, wasting time and money on due diligence and legal fees.
Practical Advice for Business Owners
Before signing a letter of intent, business owners should understand which provisions are binding and which are not, ensure that the exclusivity period is reasonable and includes milestones, negotiate the break-up fee or expense reimbursement provisions before signing, and engage experienced business transaction counsel to review the LOI before execution. The letter of intent sets the framework for the entire transaction, and the leverage dynamics often shift significantly once the LOI is signed.[4]