In case you’re thinking about buying a business — start with a letter of intent.
Most business transactions start with a conversation. The parties discuss the deal, the terms, and perhaps the price.
Then, they write it down.
Whether the buyer or the seller, a letter of intent plays a fundamental role in structuring a transaction by formalizing the agreed upon deal points and identifying opening issues.
Often called “an agreement to agree” a letter of intent is a summary of the major transaction points.
Is it a binding document – rarely?
Often very specific provisions, like confidentiality, may be binding, but most of the terms in the document are subject to the final transaction documents, often called the definitive agreement.
If you are thinking about transaction – consider these questions for your letter of intent:
- What are the most critical business deal points (such as the sales price and the payment terms)?
- What are the provisions that the parties want to be binding (such as exclusivity, costs, and confidentiality)?
- How does the letter of intent terminate and what are the consequences, if any?
Selling your business – or buying someone else’s business can be an exciting event. Well planned and documented, the parties ultimately complete a transaction both parties desire. Here is a list of initial items to consider when identifying your deal terms:
- Identify the proper parties (Corporate Name of Seller; Corporate Name of Buyer).
- Draft a simple description of the business to be sold.
- Set purchase price.
- Set payment terms (100% cash at closing; cash plus a promissory note; earn out clauses).
- Identify conditions to closing for Buyer.
- Identify conditions to closing for Seller.
- Identify Seller’s key employees who are critical to the business and determine post-transaction status.
- Identify and plan due diligence.
- Identify Seller’s covenants during pending transaction (to continue operate business in the normal course, not to make any significant financial changes, etc.).
- Determine whether there will be an exclusivity period and the length of the period.
- Consider termination of letter of intent and consequences.
- Identify binding provisions, if any.
- Establish governing law of letter of intent (and therefore definitive agreement).
- Consider a timeline for the transaction and contemplate an expiration date for the letter of intent offer as well as the overall transaction documentation process.
- Determine signature block (who are the proper parties to execute the document).
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