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a well-drafted letter of intent will provide an overview of matters that require further discussion and consideration, such as the exact purchase price. Although an exact and final purchase price cannot realistically be established until due diligence has been completed, the seller may hesitate to proceed without a price commitment.

Instead of creating a fixed price, however, the letter of intent will typically incorporate a price range that is qualified by a clause or provision setting forth all of the factors that will influence and affect the calculation of a final fixed price, such as balance sheet adjustments, due diligence surprises or problems, a change in the health of the company, or overall market conditions during the transaction period, and sometimes even an "upside surprise" in favor of the seller when a significant positive development occurs during the transaction period (e.g., the settlement of litigation, the award of important intellectual property rights, or a big new contract or customer commitment) that had not been included when the valuation range was established.

There are many different styles of drafting letters of intent, which vary from law firm to law firm and from business lawyer to business lawyer. These styles usually fall into one of three categories: (1) binding, (2) nonbinding, and (3) hybrids, like the model in Figure 4-2. In general, the type to be selected will depend upon (1) the timing and the scope of the information to be released publicly concerning the transaction (if any), (2) the degree to which negotiations have been definitive and the necessary information has been gathered, (3) the cost to the buyer and the seller of proceeding with the transaction prior to the making of binding commitments, (4) the rapidity with which the parties estimate that a final agreement can be signed, (5) the valuation ranges for the seller's company that have been discussed to date, (6) the degree to which the buyer needs or wants a period of exclusivity (and the degree to which the seller is willing to grant an exclusivity period, (7) the relative status of the parties and leverage that both the buyer and seller have, and (8) the degree of confidence each party has in the good faith of the other party and the absence (or presence) of still other parties that are competing for the transaction. In most cases, the hybrid format, which contains both binding and nonbinding terms, is the most effective format to protect the interests of both parties and to level the playing field from a negotiations perspective.

In addition to creating a framework for any potential deal with the prospective buyer, an LOI is a catalyzing event in most deals. Receiving an LOI, even one that has unacceptable terms, gives the investment banker the opportunity to reach out to each of the target buyers and accelerate the "go/no-go" decision. In a normal process, the investment banker strives to keep the potential buyers on a common time frame. However, the first LOI drives the timing of the process and, furthermore, provides a solid framework for more specific price negotiations.