Paperwork is an often annoying – but essential – part of any South Florida business or real estate transaction. While some of it is fairly straightforward, some of it isn’t. So, assuming that you can handle it yourself – or that you don’t have to do it at all, can be a costly mistake.
As some of the region’s top business and real estate lawyers, it is our job to know which paperwork is required for different types of transactions – and when it is not required at all. It is also our job to help craft relevant documents and to ensure that they are completed, signed and submitted to the correct agency or court. But that’s not all. Because we always put our clients first, the team here at Eskander Loshak LLP also takes the time to explain why certain documents are required and exactly what you’re signing.
In this week’s post, we’ll talk about the use of a letter of intent, or “LOI” when you’re buying a Florida business or real estate.
What is a letter of intent?
Basically, a letter of intent is an introductory agreement. Or, more accurately, think of it as an outline that includes key aspects of the transaction and serves as the basis for the creation of a formal, legally binding purchase/sale agreement. As such, an LOI (also known as a Term Sheet) is often used in a business or real estate transaction.
Common reasons to use LOIs
There are a number of reasons to use LOIs in Florida business and real estate deals. In general, they facilitate the following:
- Early identification of the terms both sides agree to and the terms that are potentially problematic;
- The concentration of negotiations on important terms;
- Greater consistency during the negotiations;
- The ability to obtain third party approvals; and
- The ability to promote mutual understanding of key terms.
Common reasons not to use LOIs
With all of that being stated, there are also several reasons why LOIs should not be used. For example:
- Because of the time involved and costs incurred for preparation, an LOI may be unnecessary for simple transactions;
- The time it takes to negotiate the basic terms for an LOI can hamper the pace of the deal;
- An LOI that isn’t drafted correctly may inadvertently create binding obligations to negotiate and close the deal;
- LOIs may mistakenly create a duty to negotiate in good faith, which could end a party’s ability to abandon the deal if there is a change of mind; and
- The LOI may diminish the negotiating position of a party to the agreement who wants to change the terms later.
Most letters of intent cover three key parts of any business or real estate purchase. These are the terms and conditions, pricing, and timelines. Here is a closer look at each.
- Terms and conditions will usually detail the configuration of the deal, exclusivity (a “no-shop clause” that gives the prospective buyer an opportunity to complete the transaction without competing bids coming in), and requirements for the buyer and seller to complete due diligence necessary to further the transaction.
- Pricing will include the sale price of the business/real estate as well as provisions for payment and financing, including any applicable seller financing or third-party funding.
- Timelines pertaining to deadlines for completion of due diligence, the execution of an official purchase agreement, and closing of the transaction, as well as any provisions for circumstances in which the transaction may not be completed.
In addition to meeting all of the criteria we have specified to this point, an effective, well-crafted LOI should be plainly identified as a letter of intent. This will help avoid any confusion or misunderstandings. It should also make it clear that as such, it is not a binding agreement for the purchase or sale of the business/real estate. A “good faith” provision may be included but is not mandatory.
A good LOI should also:
- Address the question of the sale of stock or assets
- Include provisions pertaining to the purchase price and reasons for said price
- Address the allocation of the purchase price in a transaction involving the purchase of assets
- Specify the method of payment
- Address any other relevant matters
Do you need an LOI for your South Florida business or real estate purchase?
If you’re considering buying real estate or a business in Miami-Dade, Broward, or Palm Beach County, we are here to help. Contact us through our website, drop us an email, or call us at (954) 334-1122 for a full assessment of your legal obligations and needs, including the drafting of an LOI (if necessary).