During our April 26, 2017 webinar, we discussed Letters of Intent (LOI) and the important role they can play in transactions. The LOI often serves as a roadmap or initial term sheet between a buyer and seller.
The LOI is generally “non-binding”, meaning that the parties may deviate from its terms. The purchase price, due diligence process milestones, and financing terms are examples of non-binding provisions that may be subject to negotiation as the deal progresses. However, some terms are binding and parties will want to ensure that they are carefully drafted. For example, provisions pertaining to confidentiality and exclusivity should be binding, and if the LOI contains an exclusivity clause then the clause should be for a defined period of time.
Small businesses concerned with maintaining their small business size status during the course of negotiations with a potential purchaser must be careful about the terms of the LOI and whether or not those terms give the potential purchaser the power to control the company. Under SBA’s Present Effect Rule, 13 C.F.R. § 121.103(d) a potential buyer and seller may be affiliated and therefore required to aggregate their revenues or number of employees for size purposes if SBA determines that Agreements between the parties, including LOIs, have a present effect on the power to control the company. A premature finding of affiliation could result in a small business losing its small business size status prematurely and jeopardize proposals being submitted on small business set-asides while the parties are in negotiations.
Your small business attorney can help you to craft an LOI that will help get your transaction started on the right foot, while simultaneously avoiding the pitfalls of the present effect rule.
About the Author: Dana Livne is a corporate specialist with PilieroMazza in the Business and Corporate Group. She may be reached at firstname.lastname@example.org.