Friday, March 15, 2013

Using Letters of Intent to Initiate Effective Business Negotiations

When exploring possibilities for a company merger, an acquisition of assets, or just a simple business arrangement, the standard and most effective approach to this challenge is through a letter of intent with a confidentiality provision. The advantage of this strategy is that you can “test the waters” of entering a potential business relationship without losing control of any information you deem proprietary.

Within any letter of intent, exclusivity and confidentiality are key elements; business interests are mutual, and neither party should divulge or share any of the private information contained in the letter with third parties. It’s important to note that while all letters of intent always include a non-disclosure or confidentiality provision, a non-disclosure agreement can also stand alone or serve as an addendum to other contractual documents.  

When developing a letter of intent, your desired goals need to be spelled out and tailored specifically to the proposed business relationship you’re seeking. You also need to state any contingencies that make the business relationship conditional. These provisions usually relate to financing or logistics requirements, which if not satisfied, will void the proposed agreement. Equally important, you need to secure some protection for both parties regarding sensitive or confidential information. A non-disclosure provision allows you to work together without fear that you’re going to be subverted or undermined by someone else’s actions — perhaps a price-bidding maneuver, high or low, depending on your positioning.

Recently, I helped two companies in merging their businesses into one larger operation, all of which began with a letter of intent to explore the possibilities. Part of that process required the sharing of financial records, private information that no company wants escaping into the public domain. Consequently, we created a non-disclosure provision citing mutual confidentiality in exchanging certain information. We needed to confirm that if the business relationship were not successful, then all the exchanged documents on paper would have to be returned or destroyed, including originals and photocopies, and that an agreed-upon mechanism for purging sensitive e-mails and attachments would have to be established.

I generally advise setting a long-term non-disclosure period, regardless of the planned success or unexpected failure of the business relationship, and that any exchanged information shared outside of the signing parties within their respective organizations should be on a strictly need-to-know basis. In proposed agreements where subcontractors may be involved, they too must be bound by the same terms of confidentiality contained in the original letter of intent and sign a non-disclosure agreement.

As noted earlier, exclusivity is important, much like having a serious, committed relationship with someone — engaged but not yet married. In fact, any letter of intent should always point out that during the course of specific business negotiations, both parties are mutually exclusive and must not deal with anyone else with the same agenda. In other words, both parties need to be able to proceed in good faith with some assurance that they are going to be working together exclusively during the term of the letter of intent. As in the case of a personal engagement that doesn’t work out, if the business relationship doesn’t come to fruition, then either party is free to pursue further transactions with other parties.

In summary, it is important to remember that the primary objective within any letter of intent is to assure exclusivity and confidentiality regarding the business relationship you’re proposing and to ensure an effective negotiation, with all parties protected.