What is a Letter of Intent in Colorado and What is its Purposes?
A Letter of Intent (often referred to as an LOI), in business law is a legal document that outlines main terms and conditions of a contemplated business transaction.
The purpose of a Letter of Intent in a commercial transaction is to have a legal document that provides the main terms of a contemplated transaction before the definitive contracts are drafted. Definitive contracts are the contracts intended to compete the contemplated transaction. If the parties discover that they are not in agreement on main terms in the LOI, the parties, or often through each of their respective business lawyers, can work with each other to come to an agreement on the main terms prior to drafting definitive contracts. Using a Letter of Intent will save considerable time, energy, and resources to reach an agreement on the main terms. Having a business lawyer draft a definitive contract where the parties are not in agreement can prove to be costly and waste each party’s valuable time, energy and resources.
Understanding the Different Types of Letters of Intent in Colorado
A Letter of Intent is an important document in a business transaction in Colorado, as it can be used to signify a basic agreement between two or more parties. LOI’s can be used for a variety of purposes, including, real estate transactions, business agreements, purchase agreements for buying or selling businesses, buying or selling substantial business assets, supply agreements, service agreements, employment agreements, and other business dealings that can have legal outcomes.
The Benefits & Advantages that a Letter of Intent offers to Businesses in Colorado.
As experienced business attorneys in Colorado, the Law Offices of Clifton Black, PC has experienced situations where the parties believe they have a verbal agreement, and want to retain the law office to draft a lengthy document. However, by using a Letter of Intent first, lawyers can find out if the parties have a different understanding or any miscommunications with each other on what the terms of the contemplated business transaction will be. By utilizing a Letter of Intent, our business lawyers are able to determine if the parties are in agreement for the main terms, or if additional discussions need to take place between the parties, or their respective business attorneys. This helps to ensure the parties are in agreement on the main terms. As experienced business attorneys in Colorado Springs, we can prepare the Letter of Intent for a Colorado Business and work with the other party or other party’s business lawyer to simplify the process.
Working on an LOI prior to drafting the main legal agreements can help ensure that the parties are in agreement on main terms before expending resources or having their business attorney spend considerable time on the legal documents. An LOI can help to facilitate negotiations and ensure that all parties understand and agree to the main terms. Furthermore, having a LOI signed by both parties can provide legal protection should any disputes arise in the future. Often while drafting definitive documents, business attorneys will refer back to the main terms of the LOI as negotiations proceed for the final legally binding definitive contracts. As such, businesses looking to conduct business transactions in Colorado should consider utilizing an LOI for their benefit.
Are Letters of Intent legally binding in Colorado?
Generally speaking, Letters of Intent are not binding in Colorado, depending on how the LOI is written. Often language will be used in the LOI to indicate that it is not binding. In some situations, the parties want the LOI to be binding. However, this is not advisable by most Colorado Business Attorneys since the purpose of the Letter of Intent is to spell out the main terms with the intent to then draft the legally binding definitive contracts. For example, in a transaction to buy and sell a business, the LOI will include the main terms. But when the actual purchase agreement and other related documents (the definitive contracts) are drafted, more specific terms will be included. Although the LOI clarifies the main terms, the parties often still have negotiations over the other terms. Since the main terms are usually spelled out in the LOI, coming to an agreement on the other more basic terms is usually quicker and easier to agree on through simple negotiations.
A Letter of Intent can be non-binding, yet have some binding terms. For example, often when buying or selling a business, each party is providing confidential information to the other party. A Buyer of a business may be required to provide its financials, or proof of funds, to show the Seller that it has the wherewithal to complete the purchase through a closing. Likewise, the Seller will likely be providing financials like a profit and loss statement, balance sheet, taxes, owner’s equity, an operating agreement, customer lists and other confidential information. As experienced business attorneys in Colorado, we want to ensure that the clients have protection when disclosing confidential business information.
Termination of a Letter of Intent.
A business owner should ensure that there is termination language in a Letter of Intent. If a Seller of a business enters into a Letter of Intent to sell a business, a Buyer may want a provision in the LOI that the Seller will not continue to entertain other offers as the Buyer may be expending resources, conducting due diligence, reviewing financials, negotiating leases, hiring a business appraiser or CPA, paying a business lawyer to draft definitive documents and other work in an attempt to buy a business. In this situation, a Buyer does not want to use its resources if the Seller is going to suddenly sell the business to another buyer.
Termination language should allow a party to terminate if the deal is not moving forward, the Buyer and Seller are no longer negotiating in good faith, or after a certain period of time has passed and the Buyer and Seller have not executed definitive contracts.