You’ve just shaken hands to buy or sell a business, now what? What are the next steps? How do you take this broad outline of terms and turn them into a binding contract? Typically, after the hand-shake deal is made, the next step is to enter into a Letter of Intent (sometimes also called a Memorandum of Understanding) that outlines the broad points that you’ve agreed upon with the buyer or seller.
A Letter of Intent is a document that outlines the key points of the deal before the final agreements are signed, or even drafted, so that the parties and their attorneys know what the final hand-shake deal will include before moving on to drafting the formal contracts.
When Should you Have a Letter of Intent?
You should think about having a Letter of Intent when you are entering a deal where you have the skeleton of the deal agreed upon, but the parties need to take time to flesh out the details, investigate, and draft the final documents. The Letter of Intent provides everyone with an outline and goals to work towards.
Items to think about for and to include in your Letter of Intent are below:
- Important Dates – Are there any restricting dates? Do you want to close by the end of a quarter or year? Is there some big milestone where a transition would be natural?
- Purchase Price – Have you agreed upon a number or a general ballpark figure that is to be finalized based on a valuation or further investigation?
- Payment – Have you discussed how the purchase price will be paid, such as a traditional loan from a bank? Is the deal contingent upon financing? Or will you utilize Seller financing? If so, is the seller financing based on an earn out metric or a set promissory note?
- Assets v. Equity – There are 2 ways to buy a business – the assets or equity. Have you all each talked to your tax professional to see what is more advantageous? What are the benefits or risks for each of you?
- Confidentiality – A lot of information may be disclosed early on or one of the parties may not want it to be public knowledge that they are looking at entering the deal. Have you all discussed confidentiality and what is the scope of information disclosed in the early stages?
- Exclusivity – Do the parties want to have an exclusivity period? If so, how long?
- Binding v. Nonbinding – Is your skeleton deal finalized enough to make it binding? Or is the skeleton more of a road map before the binding terms?
While this list is not exhaustive, the above are some of the common items to discuss with the other side and your team of professionals.
Set the Expectations & Seal the Deal
One of the key predictors if a deal will make it to closing is if the parties are all on the same page and have the same expectations for the transaction. Having a Letter of Intent is a great way to set the deal’s expectations early and in writing so that everyone is on the same page as the deal progresses.
The above article is for general information purposes only and should not be relied upon as specific legal advice. This article, or contacting Apex, does not in any way form an attorney-client relationship. If you have any questions or would like to learn more, please contact Tara Vitale at email@example.com.