Due Diligence Services: 4 Mistakes to Avoid When Writing a Letter of Intent
Writing a letter of intent is an important part of acquiring a business. Here are common mistakes to avoid during the due diligence process.
Key Takeaways
Writing a letter of intent requires a lot of input and consideration
It’s easy to make mistakes while drafting, but they could cost you
Keep these four pitfalls in mind to create a solid letter of intent
For professional help, get a free LOI review at www.offerfromelliott.com
Many factors come into play when negotiating a business deal, including writing a letter of intent (LOI). An LOI helps you create the fundamental agreement between you and the seller in the event you move forward to finalizing a deal. While it's not legally binding, an LOI shows your intention to commit to the transaction to pave the way to further negotiations.
No law requires a letter of intent to be drafted for business transactions. However, it's in your best interest to write out your expectations for the business arrangement. If the transaction is big enough, it’s advisable to work with a due diligence services expert to help you review and draft the document. That way, you can avoid costly mistakes.
To set yourself up for success, you’ll want to avoid some common mistakes that can come up when drafting an LOI. Here are four pitfalls to steer clear of.
1. Ignoring the possibility of breaching the agreement
An LOI is a nonbinding document, but that doesn’t mean you can treat the document casually. The language used in the letter might lead you to believe you have no legal duty to proceed with the deal. However, you may still be required to put your best foot forward in LOI negotiation for a defined period.
Some brokers are fond of telling buyers they can sign an LOI and change it later if they want to. This is technically true in many cases, but it ignores the fundamental reality of an LOI being a psychologically binding document.
For example, if a buyer says in writing they will pay $700,000 for the business and signs that document, the seller registers that in their head. If the buyer later changes their mind and says they’ll pay $650,000, the seller may feel like they got ripped off.
In that sort of situation, the transaction might be irreparably damaged – even if both parties go ahead with the deal. For example, the seller might have negative thoughts about the buyer, which could tarnish the relationship and the buyer’s reputation. To be safe, avoid committing to a buying price before you conduct your due diligence and know how much you can comfortably pay.
2. Overcomplicating the document
You want to keep your letter of intent as professional as possible, and one way to do that is to keep it short and straightforward. The best practice is to state only the necessary steps and agreement details you and the seller need to proceed with the negotiations. That said, be sure you are specific in the language you use so the terms and intent of your LOI are very clear to both parties.
It can be helpful to avoid too many complex details and leave room for future negotiations. The most important sections of a letter of intent, which should be brief but precise, are:
An overview of the prospective transaction
Contingencies
The due diligence time period
Confidentiality agreement and public announcement details
Expenses and who will pay them
Closing date and any other important time frames
The LOI should be clear and to the point, as long and complex sentences may confuse the reader or muddy the waters. Precise sentences can help make the language clear so both parties understand their obligations.
3. Not having the reader in mind
It’s buying a business 101 – your priority when writing an LOI should be the reader. How you frame your letter and your choice of words should center around the reader’s needs. For example, the structure you choose should depend on the type of information required by the recipient. As mentioned above, the information must also be detailed enough not to leave the reader with unanswered questions.
To achieve this goal, start by identifying the primary purpose of writing the letter and the message you want to convey. Then, put yourself in the reader's shoes and write the terms in a manner that will capture the reader's interest.
Also, don’t forget to proofread your LOI. Even an honest mistake may paint a picture of carelessness and even offend the other party. Errors in the LOI could raise concerns about your ability to be detail-oriented throughout the transaction. You don't want to lose an attractive business deal over simple mistakes.
4. Using sample content from a template
While starting your LOI draft from a template can be helpful, forgetting to remove the sample information is a common mistake people tend to overlook. That creates confusion in the LOI due to a mismatch of information.
That’s why it’s crucial to get a professional to review your letter of intent. They can go over the template with a keen eye for detail to capture errors that need fixing. Plus, they can help you customize the letter to suit your goals and needs so it doesn't look borrowed.
Remember that signing and submitting a letter of intent is a big step toward a deal that could change your life. So, approach the process carefully and consider working with a professional to prevent mistakes you may not notice.
Get professional guidance when drafting your LOI
A letter of intent is standard practice in most business acquisition transactions. Despite not being legally binding, an LOI with mistakes could cost you heavily later. Invest as much time as possible when drafting an LOI and consider working with an expert to ensure the letter is free of common errors that could water down the transaction.
At Guardian Due Diligence, we help buyers draft letters of intent and review them to ensure they don’t have mistakes or ambiguity. Free LOI reviews are available at www.offerfromelliott.com. You can also contact us to schedule a call for help with your LOI and other due diligence services.