Do You Need A
Letter of Intent?
A letter of intent (LOI) is a document describing preliminary terms in a complicated business negotiation. It is usually written in a letter format by one party with a place for the other party to sign, indicating agreement. Sounds simple, right? Unfortunately, when the LOI is not clearly written, misunderstandings and complications can arise from the ambiguity if parties interpret the language differently. One party may intend the letter to be completely non-binding, while the other may want parts or all of it to be legally binding. If the deal falls through when parties had different expectations, litigation may ensue.
Hypothetical Example
Dr. Jeanie Lock worked for Dr. Bill Manor at Allgood Animal Clinic from the time she was 15 until she was accepted to veterinary school. Dr. Manor was a great mentor and teacher and, before Dr. Lock went to vet school, they talked about her someday becoming a partner in his practice and eventually taking over when he wanted to retire. So, when she graduated from veterinary school, she returned to work at Allgood. She figured it would take two to three years for her to develop her surgical and diagnostic skills, and assumed that when Dr. Moore turned 60 (in three years), he would bring up the partnership deal. Because she hated to negotiate, she decided to wait and trust Dr. Manor to bring up the subject when he was ready.
Three years passed. Then five. By this point, Dr. Lock was no closer to becoming a partner than when she signed on. Plus, around that time, another associate at the practice quit to spend more time at home with her new baby. In response, Dr. Manor hired a new, younger associate as a replacement, one who wanted to own his own practice someday. Suddenly, Dr. Lock felt threatened. If she didn't make a claim on the practice soon, this new practitioner could become the partner! So, she wrote Dr. Manor a letter asking if he still wanted her to be his partner; if so, she wanted that in writing.
Dr. Manor therefore wrote a letter of intent, not using an attorney to create or review the language used. Both signed the letter, which stated that, within a month, he would hire a purchase appraiser to determine the value of the practice. Dr. Manor agreed to not consider any other buyers, while Dr. Lock agreed to not consider buying into another practice - and to keep any information learned about the practice confidential.
Dr. Manor hired a business appraiser almost immediately. The appraiser, though, worked at a glacial pace and was perpetually six months away from finishing the valuation. This dragged out for a year and a half before Dr. Manor fired him, hiring a more specialized veterinary appraiser. Though the new appraiser was more efficient, the process was still arduous. Two years after the doctors signed the letter of intent, there was still no purchase price, which held up the rest of the process.
Both doctors were frustrated with how slowly things had progressed. Dr. Lock wondered if Dr. Manor would ever sell her the practice; frankly, she was no longer even sure she wanted it. After seven years of working at a fast-paced, high-revenue veterinary practice with 15-minute appointment slots, she was burning out. Ultimately, Dr. Lock informed Dr. Manor she was not interested in the partnership anymore. A week later, she gave notice that she was leaving completely.
Dr. Manor felt betrayed and sued Dr. Lock for the cost of the practice appraisal. The basis of his suit? He had spent time and money hiring advisors because he had relied on Dr. Lock to purchase an interest in his practice. He felt she made a commitment for which she should be held accountable, and he used the letter of intent as evidence. Dr. Lock insisted that the letter didn't require her to pay for the appraisal; that she was free to pull out of the negotiations at any time; and that the letter was only meant to help them move the process along. It was not, Dr. Lock stated, a formal binding document.
Ultimately, the situation did not turn out like either veterinarian had hoped. Originally, the letter of intent had helped them to establish their desires to pursue partnership and outline a basic plan. However, when the deal fell through, there were questions about whether or not the agreement was binding; if so, what were the obligations? What would happen if either of the doctors broke those obligations? Who was entitled to damages?
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