Saturday, March 5, 2011

Letters of Intent, Memorandums of Understanding, Term Sheets

Letters of Intent (LOI), Memorandums of Understanding (MOU), and Term Sheets are similar documents have the same basic intent. They serve as a form of interim agreement or discussion point until formal agreements can be negotiated.

There are two major risks in using any of these types of documents.
  1. Unless the document is properly drafted it can establish a contractual obligation. All that is need for that to occur is for it to appear that the parties intended to be bound to its terms and have its content be sufficient enough to be enforced.
  2. Once they are executed, what’s included in that document usually will be considered firm and not subject to further negotiations. There can easily be situations where you may need to change those terms as other terms are agreed and other information is learned.

You do not need any of these documents to be able to share information in anticipation of a potential agreement. The parties can share information simply by entering into a confidentiality or non-disclosure agreement to help determine if a relationship is possible. LOI, MOU or Term Sheets do not need to be binding to establish an exclusive right to negotiate with the other party for a specific period of time.  A non-binding document as to the final deal can establish exclusive negotiation rights for a period of time.

While LOI, MOU, and Term Sheets are sometimes considered to be a way to expedite things my experience is that many times the negotiation of them can take significant time if you do them right.  The use of an LOI, MOU or Term Sheet does not help in negotiations as it delays uncovering significant differences between the parties with respect to the full terms of the agreement. 

If you must use one of these documents, I would provide a copy of your standard agreement template for the Supplier to review and respond to or redline along with the LOI, MOU or Term Sheet.  The reason I would do that is:
  1. It provides you a better understanding of the total deal before you start to make any concessions on the key business terms of the relationship.
  2. It keeps you from wasting time with Suppliers where you will never reach agreement because of significant disconnects over the terms..
  3. It reduces the potential of investing so much time with the one Supplier that you can’t consider other options and may be forced to take less as a result.
  4. It sets a benchmark against which the LOA, MOU or Term Sheet is being proposed. If you provide it later, be prepared for the Supplier saying that their agreement wasn’t based on those terms and if you want those terms they will need to make and adjustment (usually to their price) to agree.

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