Before a seller agrees to sell their business, they want to make sure they get the best deal possible. The formal negotiations between the buyer and the seller begin with a letter of intent (LOI) to buy a business. It offers the buyer a chance to convey their proposition. However, as the negotiations continue, the purchase conditions stated in the letter of intent could change. As a result, the letter is not binding. Nevertheless, the items discussed in the letter of intent to purchase a business will often be included in the final agreement before purchase. This article will explain what a letter of intent for a business purchase is, who should sign it, and how to write one.
What is a Letter of Intent?
A letter of intent to purchase a business, as the name implies, is a letter written by the buyer of a business to notify the seller that they intend to purchase their company and to outline the terms of the agreement under which they intend to proceed. To protect both the buyer and seller, this agreement should outline everything about the potential sale, from the price to what will happen if the deal does not take place.
This document aims to provide the seller with an early indication of the buyer’s intention, outlining what they expect to achieve and how they plan on doing it. Additionally, it helps to avoid any last-minute deals when the parties are negotiating before a purchase is made. Letters of intent can be used for various kinds of business purchases like buyouts or acquisitions, mergers, joint ventures, etc.
A letter of intent to purchase a business also provides non-legally binding protection to both signatories. For example, an LOI to purchase a business protects the buyer from any last-minute changes in the seller’s plans that may alter the agreement. The terms and conditions of the transaction are also described in a letter of intent before a formal agreement is made. The document can also be used to secure loans to raise funding for the purchase.
Types of LOIs
There are two types of letters of intent: short-form and long-form. You can choose to use either of these, depending on what you wish to accomplish:
Long-form letter of intent
A long-form letter of intent is comprehensive and has a broad scope. These letters must include all pertinent information regarding the buyer’s intentions, including the buyer’s identity, confidentiality, dispute resolution procedures, the closing date, and any special terms or conditions.
Because of their scope, they are more detailed and help prevent the majority of issues. They can speed up and streamline the transaction, lowering the cost due to the avoidance of legal fees. As a result, this type of letter of intent is more common when purchasing large and complex companies.
Short-form letter of intent
A short-form letter of intent covers the main terms and conditions. This type of LOI can also be used for mergers and acquisitions in which only one party needs to sign the document. The more intricate details are reserved for a later time because it typically does not specify the particular terms of the transaction but merely notes what both parties propose for the agreement and how it should be executed. This kind is typically used to buy a company through mergers and acquisitions that are small enough to only need one signatory.
Components of Letter of Intent to Purchase Business
Several components form the core of a letter of intent to purchase a business. The following sections explain the components of the LOI:
Effective date and subject
The effective date should be written at the beginning of the letter. It is also known as the date of execution. The subject of the letter of intent, which is the intent to purchase the business, should also be stated.
Names and mailing addresses of the parties
Information about all parties must be included, and each party’s name must be written in full. Include the name, address, phone number, and email address of the person signing the document as well. Sometimes fax numbers may also be mentioned.
Purchase price and transaction type
It determines how much the buyer intends to purchase from the company. Include the price in this section if the buyer is paying a specific amount to the company. If the price is determined by percentages, it should be stated what portion of the company’s value must be purchased. The letter of intent to acquire a business also mentions the payment method (whether cash, entire or part of the stock, promissory notes, etc.) and the type of transaction (if it is an acquisition of all shares, assets, a junction, etc.).
A clause that mentions the business’ real estate should be included to cover details about the location of the business. Additionally, information like the mailing address, the real estate’s legal description, and whether any building restrictions may be required should be mentioned.
It is critical to specify whether the purchase can be made in one lump sum or in installments. If the payments are made in installments, it must specify how much must be paid each month until the debt is paid in full. Include any additional charges that might be related to the terms, such as late fees or others.
Legally binding nature
An LOI to buy a business may or may not be binding, so it must contain a clause that expressly states whether it is. If made binding, it must indicate the consequences of breaching the terms and direct that a formal agreement is not needed as it serves the same purpose.
Upon purchase, the buyer is expected to take control of the business’s bank accounts. Thus, the letter of intent to purchase a business must state that the seller is obligated to ensure that the bank accounts remain active or operational before closing, which would imply leaving a certain amount of money in those accounts.
The letter should then state that the seller is obligated to make decisions and take actions in the business’s best interest before and after the sale. Their actions should not disrupt the regular operation of the business.
Closure of the deal
What happens if the deal is executed should be clear under the “closing” section. Actions that signify the closure of the deal should be indicated. These can include fulfilling the terms of the purchase agreement if the letter of intent is binding or signing the official contract if it is not.
Costs of the closure
The buyer and seller ought to agree on the closing costs for the deal. This covers all potential costs, such as commissions, legal and notarial fees, and more. Again, these costs can be assigned to both parties or only to the buyer.
The letter of intent to purchase a business should specify when it will expire. If a formal agreement has not materialized, the agreement between the buyer and the seller can be terminated. It should also state that either party can terminate the agreement should there be a default. The default is also noted in the event of a termination.
Access to data about the business
The buyer is entitled to any information about the business that may be required to perform due diligence, and both parties must agree to this. However, it must be stated in this section if the seller does not want to divulge delicate information about their company, including its finances.
If the buyer is purchasing the business, then the letter of intent to purchase a business should state certain conditions that can affect the deal. This includes clauses that cover issues such as a change in ownership or transfer of ownership, a change in management, or setting a new cash-flow target. Any applicable conditions should be added to this section.
In an acquisition, both parties may have sensitive or confidential information about the transaction. A confidentiality clause in the document states that neither party will disclose this information to a third party unless necessary.
Good faith negotiations
The letter should note that the buyer and the seller agree to carry out all negotiations in good faith. They must follow this rule by telling the truth and working hard throughout the negotiation process.
Both parties are prohibited from engaging in similar negotiations with any other party. However, contracts made before the start of these negotiations are not covered by this clause.
Representation and warranties
The buyer and seller should also agree in the letter of intent to represent specific facts and warranties. For instance, they might decide that the company should have a certain level of assets, income, or working capital before they consider buying it. It must also be stated in the letter of intent to purchase a business how the situation will be handled if there is a breach of warranty.
Currency and applicable law
The letter of intent to purchase a business should state which currency is being used for all payments and the applicable law(s) under which the deal will materialize.
A severability clause states that if any of the terms are declared invalid due to a court order or other legal action, the remaining terms and conditions will still apply.
If the buyer and seller’s negotiations fail, the letter of intent should include a clause outlining how the dispute will be resolved. It can include arbitration, mediation, or judicial proceedings.
Counterparts and electronic means
A clause that validates copies of the letter of intent to purchase the business should also be included in the letter. It should also allow electronic copies to be transferred and state that the copies will have the same legal authority as their counterparts, physical copies, and the original letter of intent.
The letter should contain the signatures of both parties. This section should have the addresses of the buyer and seller as well. It should also include the date and time when it was signed. The letter of intent to purchase a business contains terms of sale that must be agreed to by both parties, and this agreement is evidenced by signatures.
Writing a Letter of Intent to Purchase Business
Any prospective buyer or seller should be able to decide from the letter whether they want to pursue a transaction with one another by reading all pertinent information.
The following steps can help create a comprehensive letter of intent to purchase a business:
Write the introduction
The introduction should state the letter’s purpose (to purchase the business), the parties involved (the buyer and seller), and a general description of the business, including its location and contact information, its products or services, and any other relevant information.
Describe the transaction and timelines
The following section should outline the parties’ agreement regarding the specific transaction. This section should also include important details such as the purchase price and the expected date of the transaction. However, these details are preliminary and are subject to change as the transaction progresses.
This section should list any significant risks or potential problems affecting the transaction. It should include a clause stating that any issues that arise during the due diligence period will be addressed. A common contingency for buyers is that the transaction will not go through unless they are satisfied with their due diligence.
Perform due diligence
The buyers and sellers should perform a risk assessment or due diligence. This is a process by which the parties can determine whether they are willing to buy the business or not. This can be accomplished by using the services of an audit firm, which inspects all relevant documents and records to ensure that there are no irregularities or inaccuracies.
Include covenants and binding agreements
Whether the letter of intent is legally enforceable or not, it may include binding agreements between the seller and the buyer as well as restrictive covenants (sub-agreements). Examples of sub-agreements are NDAs and non-compete covenants. An NDA forbids both parties from disclosing any information that might be confidential or proprietary to the other party.
A non-compete clause forbids the buyer from using any information provided by the seller in confidence to launch a rival company. The parties may also agree to a covenant stating that each party shall pay for its costs incurred in connection with the negotiations, such as accounting fees, legal fees, travel expenses, license fees, etc.
Indicate that it is a non-binding contract
The non-binding nature of the agreement should be clearly mentioned in the letter of intent to purchase a business. The execution of a more formal memorandum of sale is required before this letter can be regarded as legally binding.
Write the closing date
The letter of intent should also include a specific closing date. This is the final date that the transaction is expected to close. The final step in creating a letter of intent to purchase a business is to include the signatures and addresses of both parties. The letter should also state that if the closing date comes and the negotiations have not progressed, the transaction and the LOI will be terminated. If there are any outstanding issues with the letter of intent, they should be addressed in this section.
Letter of Intent to Purchase Business Template
[Buyer’s name and position]
Dear [Seller’s name],
This letter serves as a memo regarding the intentions of [Buyer’s company] to acquire the business assets of [Seller’s name] as per our conversation on [Insert date].
A thorough due diligence process will precede the transaction. It will not close until we have conducted it, so I propose that we mutually agree on the following terms and conditions. This letter aims to provide you with an opportunity to negotiate any terms that are not satisfactory to you.
1. Our discussions indicate that the value of the transaction for you is significantly higher than the price we can pay. Therefore, I am prepared to offer you [insert a number between $ and $] in exchange for your business assets.
2. This transaction will be part of an ongoing partnership between my company, [Buyer’s company], and your company, [Seller’s company]. When our relationship is formalized, we will exchange legal documentation that will set forth the exact details of this transaction.
3. Contingencies – Before parties can reach a final agreement, [the buyer] must be satisfied with the due diligence procedures, all information, and documents that [Seller] provides, as well as the negotiation of employment contracts with key personnel at [entity].
4. As part of our due diligence modus operandi, we require access to all pertinent documents and records of [Seller’s name] and its subsidiaries for the last (1) year. Accordingly, upon the completion of this transaction, you will have to agree to provide us with such documentation and records for a period of [insert number]. This process will be paid for by us.
5. Public Announcements and Non-Disclosure Agreement: All parties concur not to disclose any information regarding this letter or any forthcoming negotiations that will take place without the written consent of the relevant party to the public. All information that [seller] and buyer share will remain confidential between the parties and their legal representation.
6. You will continue to direct the daily business operations of [Seller’s name] for a period of [insert number], at which time you will be released from your duties.
7. Except for the section titled “Public Announcements and Non-Disclosure Agreement,” this Letter of Intent is nonbinding for both parties.
8. We reserve the right to terminate this letter of intent if any of the following conditions are not met until [Insert closing date]:
I look forward to continuing our negotiations regarding this opportunity shortly. Again, please feel free to contact me with any questions or concerns you may have as we work toward finalizing this matter.
Agreed to by Buyer(s)
And Accepted and Agreed by Seller(s)
Sample Letter of Intent to Purchase Business
Mr. Harvey, CEO
Miami, Florida 36166
Dear Mrs. Danes,
This Letter of Intent (LOI) confirms BigEd Microfinance’s interest in purchasing a 50 percent share of SEN8 Solutions. This letter also outlines some conditions that a future agreement will include. However, before a final agreement can be reached, BigEd Microfinance must be satisfied with the due diligence processes and all information and documents provided by SEN8 Solutions during the negotiation process.
1. Transaction: The LOI is for a 50 percent share of SEN8 Solutions, a juvenile justice consulting firm. In this transaction, BigEd Microfinance is acquiring half of the capital stock for $1.2 million and doing due diligence to ensure that the company will continue to provide exemplary products and services.
2. Due Diligence: BigEd Microfinance asks that SEN8 Solutions provides all business information available for BigEd Microfinance’s review and analysis and any financial information that can be used for due diligence purposes. This includes the financial statements, contracts, and other legal documents of SEN8 Solutions until the closing or termination of this LOI. In addition, BigEd Microfinance agrees to comply with a confidentiality agreement and will not directly contact the clients or suppliers of SEN8 Solutions unless authorized by the latter.
3. Contingencies: The closing of the letter of intent shall be contingent on the satisfactory completion of due diligence by BigEd Microfinance. The information needed for due diligence by BigEd Microfinance may include but not be limited to: the financial statements and business plans, all contracts, leases, bank records and other legal documents, tax returns, and financial reports.
4. Confidentiality Agreement: All parties agree not to disclose any information regarding this Letter or any forthcoming negotiations that will transpire without the relevant party’s written consent to the public. All information that BigEd Microfinance and SEN8 Solutions share will remain strictly confidential between the parties and their legal representation.
5. Expenses: All parties consent to carry their expenses, including legal or professional fees resulting from due diligence procedures or any other matter associated with the intended transaction.
6. Nonbinding Agreement: Except for the paragraph titled “Public Announcements and Confidentiality Agreement,” this Letter of Intent is nonbinding for both parties.
This allows all parties to discuss prospects and possible deals before reaching a final agreement.
In consideration of the preceding,
It is agreed that under the provisions of this LOI, the parties shall engage in negotiations and the due diligence process before any agreement is reached. Accordingly, the parties agree to submit all information necessary to comply with the terms and conditions of this LOI within ten (10) days from the date of signature.
7. Closing date: The closing of the specified transaction should take place no later than November 30, 2022. If the named parties do not conclude the specified transaction, the “Public Announcements and Non-Disclosure Agreement” clause still holds, as does any other confidentiality agreement.
Agreed by seller(s)
And Accepted and Agreed by the buyer(s)
Some of the tips for writing a comprehensive letter of intent when purchasing or selling a business are:
Provide correct information
Always review the letter of intent to purchase a business before sending it to the other party. Ascertain that all the details such as the company’s name, contact details, amount, etc., are mentioned accurately. The LOI is a formal letter and should be drafted with proper attention.
Keep it short and simple
Keeping the letter of intent short and straightforward is the best way to ensure that it receives desired attention from the other party. The LOI can record the pertinent details of the transaction only, and the rest can be refined later as negotiations continue.
Hire an attorney (If needed)
Hiring an attorney to help with the letter of intent to purchase a business is advised when both parties are unfamiliar with the legal formalities. This can ensure that both parties better understand its clauses.
Try to ensure that the tone of your letter is professional and is written concisely and clearly. Wordings should reflect that you are serious about this transaction. Use statistics, as they are more likely to convince potential sellers or investors to work with you.
A letter of intent to purchase a business is usually a one-page, professional document to establish and promote engagement between prospective buyers and sellers. It is the first and most decisive action taken during the negotiation process. A letter of intent establishes a connection and builds trust and confidence in each party. It also discusses logistics, timelines, and milestones for the transaction.
A letter of intent to purchase a firm can be a formal, written agreement or a non-binding arrangement. As a result, it will vary from one transaction to another and should contain the specifics of that exact transaction.