Selling a business can be complex. A business sale involves considerable negotiation. After the buyer and seller have come to a basic agreement regarding the business sale, the buyer will typically send a letter of intent to purchase the company. This letter expresses the buyer’s interest in buying the business and may lock the seller into negotiations with them. The letter of intent is an important first step in selling a business and sets the tone for the rest of the transaction.
What is a Letter of Intent?
A letter intent is the document that outlines the purchase and sale of the business. Although it is not legally binding, a Letter of Intent shows good faith and interest of the parties in proceeding forward with the deal. The Letter of Intent also involves confidentiality, and allows the buyer to evaluate the company’s revenue, expenses, and operations before entering into a formal contract.
What Goes into a Letter of Intent?
A letter of intent is non-binding — but the letter clears the way for further negotiations. The buyer has an interest in keeping the terms of the letter vague so they can be negotiated and updated as the process moves along. However, any potential deal breakers should be discussed before substantive negotiations begin and further resources are invested into the transaction.
The elements that are generally included in a letter of intent for a business sale include the following:
- The purchase price and payment terms
- Whether it is an asset or stock sale
- Details regarding assets included in the sale
- Whether any liabilities will be assumed
- The process and timeline for the buyer to conduct due diligence
- A period of exclusivity in which the seller agrees not to engage in negotiations with other potential buyers
- Conditions that must be satisfied before the deal is completed
- A confidentiality clause
In addition, a buyer should also consider including a provision that allows them to opt out if certain conditions cannot be met. For instance, a letter of intent usually contains terms that specify the sale is contingent on the buyer obtaining financing. The letter can state that if the buyer is unable to secure the necessary financing, they would be able to pull out of negotiations for the transaction.
Why is a Letter of Intent Important if it is Non-Binding?
A letter of intent does not lock the buyer and seller into a deal. The Letter of Intent serves to ensure they are on the same page as they work toward a final agreement. Although a letter of intent is not a binding contract, the Letter is important for several reasons. to the Letter of Intent provides a framework for the terms of the transaction, sets the expectations of both the buyer and the seller. A Letter of Intent also provides the parties with a level of certainty knowing that the other is committed to working toward a deal.
While drafting and negotiating a purchase agreement can be time-consuming, a letter of intent can help to save time and money. The parties can agree on the major terms before spending money on a detailed contract — and they can discover any deal breaking issues before moving forward. The buyer or seller can walk away from the deal if the terms aren’t agreeable before incurring the expense of drafting a full purchase agreement.
Contact an Experienced New York Business Attorney
If you are considering buying or selling a business, it’s essential to have a skillful business attorney by your side who can guide you through the process and ensure your interests are protected. Providing knowledgeable counsel and trusted legal services, Brinen & Associates advises clients regarding a wide variety of business matters. Call (212) 330-8151 or send us a message to learn more about how we can assist you.