Last Updated on February 20, 2023 by lukesguide
If you have recently started negotiations to either buy or sell an online business, entering into a Memorandum of Understanding (MOU) is probably something that has come up.
There is often confusion about MOU’s and how they differ from a terms sheet, heads of agreement, or a letter of intent.
During my 10-plus years as a corporate M&A lawyer, I have drafted and negotiated hundreds of these documents and learned a thing or two about them.
There are a lot of myths out there when it comes to MOU’s so I thought I’d clear a few things up for you, including:
- what is a Memorandum of Understanding;
- what is the purpose of a Memorandum of Understanding;
- when you would use a Memorandum of Understanding;
- are Memoranda of Understanding legally enforceable;
- what should a Memorandum of Understanding include;
- what is the difference between a Memorandum of Understanding and a Memorandum of Agreement (MOA); and
- is A Memorandum Of Understanding Different From A Heads Of Agreement, Terms Sheet Or Letter Of Intent?
In its simplest form, an MOU is a non-binding written ‘agreement’ between two or more parties. An MOU is often used during the early stages of negotiation.
In the context of a business sale, a Memorandum of Understanding is a document that sets out (at a ‘high level’) the key terms and mutual understanding of two or more parties that may look to enter into a formal contract for the business sale at a later stage.
An MOU differs from a binding agreement such as an asset or stock sale and purchase agreement. This is because an MOU merely sets out the common line of action for the parties involved but is not legally binding.
Think of an MOU as the middle-ground between an informal gentlemen’s agreement and a legally binding contract.
The purpose of a Memorandum of Understanding is to provide a mutually beneficial framework for a proposed sale of a business deal in written format. An MOU is a fairly simple and efficient way for two or more parties to record the outcomes of early-stage negotiations for the sale of a business.
An MOU is not a binding contract and does not typically include any of the usual legal provisions of a formal legal document.
For this reason, an MOU is typically negotiated between the parties (or their brokers) before lawyers become involved. While this is often the case, it can still pay to have a lawyer look over any MOU before you sign it.
A Memorandum of Understanding should be used by the parties to a proposed deal during the initial negotiation period. At this early stage, an enforceable document is not usually required but the parties typically want a paper trail of the key deal points discussed.
This is helpful to form a mutual understanding between the parties before formal legal agreements are prepared.
Generally, a Memorandum of Understanding would be non-binding and not legally enforceable.
However, this will depend on how the document is drafted and what the intentions of the parties were when they entered into the MOU. Sometimes international law may play a role as well as the law of some countries may determine that an MOU or MOA is enforceable.
Sometimes the parties will want specific clauses in the MOU to be legally binding. For example, the obligation for the parties to keep confidential any information they receive from the other party is an obligation that should be enforceable.
This can be achieved by making it clear in the MOU that certain obligations are legal binding or by having in place a separate agreement that is binding (i.e. a confidentiality agreement or non-disclosure agreement)
Because a Memorandum of Understanding (MOU for short) is the framework of a formal agreement to be drafted at a later stage, the MOU should include all of the important terms discussed by the parties.
The MOU does not need to be overly detailed and can just set out a broad written description for each term to be included in the final agreement.
Generally, an MOU should include:
- Details of the parties (i.e. names, contact information, etc).
- Broad objectives of the arrangement.
- Whether the MOU or specific terms are to be legally binding on the parties.
- Duration or term of the MOU
- The responsibilities of both parties under the MOU
- Agreed methods of communication between the parties
- Dispute resolution procedures
- MOU variation procedure
- Confidentiality requirements
There are no real differences between a Memorandum of Understanding and a Memorandum of Agreement. Typically, both of these documents are used to record the mutual agreement between two or more parties in a non-legally binding document.
MOU’s and MOA’s do differ from a formal contract or agreement. However, a formal contract or agreement is usually based on the inclusions in the MOU or MOA.
How Is A Memorandum Of Understanding Different From A Heads Of Agreement, Terms Sheet Or Letter Of Intent?
Generally, a Memorandum Of Understanding, Heads Of Agreement, Terms Sheet and Letter Of Intent are the same thing.
The documents may be structured and formatted slightly different but in the end, they all serve the same purpose which is to record the high level deal terms for a business sale without entering into a formal contract.
If you are buying or selling an online business, it is a good idea to record your discussions with the other party and document them in an MOU.
An MOU can be used as a framework for any type of agreement and will set out how you plan to work together with the other party to make the deal happen.
Although an MOU is not usually legally binding, it is still worth getting a lawyer involved to make sure there are no issues.
Have you used an MOU before? Did the MOU make the process of drafting formal legal documents easier down the track? Let us know in the comments.