There are many documents that may be used by buyer and seller to indicate their potential desire to consummate a transaction. The main difference between them is the degree of commitment the buyer is showing to the seller. Think of them like different stages in dating. There are many steps between the first date and getting married.
Terms Sheet – Often a list or a bullet-point outline of the major terms of the deal. Typically a buyer gives the seller a terms sheet, but sometimes the buyer proposes a list of terms that it is looking for in completing the deal. Generally, they are non-binding, unless otherwise stated, and become the basis for further discussion and negotiation.
Heads of Agreement or Heads of Terms are other less commonly used names for a terms sheet.
Letter of Interest (also LOI or LoI) – Similar to a terms sheet a letter of interest is usually in narrative form outlining the terms of a potential deal. Often they are also sales documents where the buyer can compliment the seller, tell them about their history and why they are the best buyer. Then the outline the major terms of the deal just as a terms sheet would.
Indication of Interest – Sometimes this phrase is used in merger and acquisition transactions, but probably should not be. An Indication of Interest is more commonly known to be a potential stock buyer’s desire to buy stock in the stock market before it is available for purchase—pre-IPO.
Memorandum of Understanding (MoU) – In terms of commitment a memorandum of understanding may lie somewhere between a letter of interest and a letter of intent. It outlines the terms of a potential transaction but is still non-binding except for those specifically mentioned elements which may have the force of a contract. Those might include confidentiality agreements, an agreement for exclusivity or “no shopping” for some period, an agreement where the buyer agrees not to solicit customers or employees, and a host of other things.
Letter of Intent (LOI or LoI) – Typically a letter of intent is the most serious engagement in the courting ritual. It indicates that the potential buyer is very serious about entering into a definitive agreement to purchase the business. Again, unless there are specific provisions agreed to otherwise, it is non-binding and its terms are subject to the due diligence that is to follow if the seller agrees in principal to the terms. Some LOIs are fairly brief and leave most of the detail to be covered in the purchase agreement and others are very detailed to curtail the need for further negotiations. In some transactions, buyers may prefer to go directly to the final purchase agreement if they have tentative agreement on most major points and if they want to save the expense and time of negotiating the terms in the LOI. The determination is based on the complexity of the deal and the experiences of the investment bankers, lawyers and buyers involved in the deal.
The Purchase Agreement
There are a host of terms use for the final agreement that will legally bind the deal and set forth all of the terms and conditions to be agreed to by both parties. They include:
· Purchase Agreement
· Definitive Purchase Agreement
· Asset Purchase Agreement
· Stock Purchase Agreement
· Acquisition Agreement
· Acquisition Purchase Agreement
Most of these are interchangeable, except that the term Asset Purchase Agreement is used when just the assets of a business are purchased and not the corporation itself, and Stock Purchase Agreement is used when the capital stock of the business is being purchased. In most smaller business transactions asset purchase agreements are used to minimize liabilities for the purchaser. There are times, however, when a stock purchase agreement is beneficial for tax and other considerations.