Prior posts discussed the basic advantages and disadvantages of structuring a sale of a business as a stock sale or an asset sale, as well as the initial considerations in agreeing to structure a sale as an asset purchase. This series will continue to expand on these types of sales with the next step in the process, the documents by which these sales begin.

Early negotiations in the sale of a business often prompt the parties to create a document that outlines the initial agreement on the broader strokes of the sale. This is done largely to nail down the rough outline of the sale so that negotiation over the finer details can begin, potentially expediting the sale process. This document can take, generally, one of three forms - a Term Sheet, a Letter of Intent or a Memorandum of Understanding. The differences between these forms of agreement are largely in the formalities - the outcome and agreement of each is similar, although they can vary in how much the particular terms of the agreement binds each party. All documents purport to define the intent of the parties to make an agreement. This post will discuss the differences between the documents first and then turn to the content of the documents of which drafters should be aware.

The most basic of the three documents is the Term Sheet. The Term Sheet is a simple bullet-point list of agreed terms that, when standing alone, is signed by both parties as a general matter. The form dispenses with the prosaic description of terms in favor of direct, brief statements of the terms of the agreement. The advantage of this form of document is that is a direct and bare statement that is easy to follow and doesn't leave much room for uncertainty. It is usually not binding on the parties to any real degree.

A Letter of Intent is, as it sounds, an expression of the intent of the parties to consummate a transaction according to certain deal terms, the details of which will be set out in one or more definitive agreements. Typically, a Letter of Intent is delivered from one party to the other with a request that the second party agree to the terms of the Letter of Intent by its signature below the sending party's. As often as not, however, the receiving party will revise the letter to propose different deal terms to the sending party and negotiations will continue until the letter is satisfactory to both parties. A Letter of Intent tends to include more provisions that can be binding on the parties than a Term Sheet, such as non-compete and non-disclosure agreements.

The Memorandum of Understanding is generally the most detailed and potentially binding of the three forms. Although a Memorandum of Understanding most resembles a contract between the parties, because it is more detailed, it will usually contain language expressly stating that the Memorandum is not binding upon the parties and that none of the parties intend to be bound unless and until they execute one or more definitive agreements.

The choice of document form is more based on the preference of the parties than for any other legally-operative reason. Each form offers nearly unlimited variations, so there are no true hard and fast rules as to which document fits which transaction most closely. It's in the drafting of the documents themselves, however, that ultimately decides the terms of the agreement.

In the terms of the document, there are pros and cons to being either broad or specific. Tight, explicit, specific terms in the preliminary document may be the result of thorough negotiations and can save time in the final sale agreement, but they can also be a trap for the unwary and dissipate any wiggle room future negotiations might need. Standard items in a preliminary agreement are the information of all the parties, the purchase price and payment terms, any covenants the parties want to agree to be bound by (non-compete, non-disclosure, non-solicitation, limitation of liability, etc.), and the structure of the deal. This document will generally be the first place where the decision to treat the transaction as an asset sale or a stock sale is made.

Careful drafting, no matter what the form, is necessary to keep the document from becoming a contract for the terms expressed therein. Just because the document takes the form of a generally non-binding agreement doesn't mean that the document can't be objectively and reasonably found to be a binding contract. Indeed, a preliminary document containing the general terms of an agreement such that a contract can be found may well be binding on the parties if their intent that the document be non-binding isn't explicit. A drafter should make the document non-binding if the parties intend not to be bound through the addition of a clause that the document imposes no legal obligation or duty on the buyer or seller.

In choosing between an asset sale and a stock sale, the next items to consider are the liabilities and tax consequences of each sale structure. These issues will be discussed in my next post in March.