Letters of Intent for Buying a Business

Entering into a letter of intent is sometimes helpful in approaching a particular acquisition. A letter of intent allows the parties to indicate that they are seriously interested in doing a deal and wish to explore discussions further. Here are some of the questions the letter of intent should attempt to answer.

Entering into a letter of intent is sometimes very helpful in approaching a particular acquisition. A letter of intent allows the parties to indicate that they are seriously interested in doing a deal and wish to explore discussions further. The letter of intent lays out the principal terms of the proposed purchase to make sure that the parties have a "meeting of the minds" before they devote the greater amount of time, effort and money it takes to enter into and consummate a definitive acquisition agreement.

The "Intent" of the Letter of Intent

Here are some of the questions the letter of intent should attempt to answer:

• Structure. What is the basic structure of the deal? For example, it is a purchase of assets or a purchase of stock?
• Price and Terms. How much money is involved? Will the payment be in cash at the closing or spread out over time?
• Main Obligations. What are each side's key obligations?
• Closing. By what date will the parties try to sign a definitive contract and close the deal? Your letter can also say that if a definitive contract is not signed by that date, then both sides are free to go elsewhere or continue discussions, at their option.
• Exclusivity. Will the negotiations between the parties be exclusive for a period of time? If the seller agrees to exclusive negotiations, he will want this to last only for a limited period of time, such as 21 days or a month. Agreements for exclusive negotiations can be legally binding on a seller. Buyers often like to get exclusive negotiation provisions as it can give them some leverage in the later negotiations.
• Conditions. What are the key conditions that have to occur before a final agreement can be executed? For example, buyers typically want at least two conditions - that they are satisfied with their review of the business and that they have obtained whatever financing is needed to close the deal.

Short and Sweet vs. Lengthy and Comprehensive

Opinion is divided about the best way to write a letter of intent. One view is that letters of intent should be short and sweet, highlighting only the really important points. In that way, the parties feel that they have momentum towards a deal, but without devoting the greater energy needed to reach an agreement on every important point.

The other view is that letters of intent should be relatively long with every major deal point addressed in the letter. The feeling is that, with such a letter, the parties will be less likely to encounter stumbling blocks when they try to put together a definitive contract. The approach you take will depend on the circumstances and your personal preferences, and in many deals there is no letter of intent at all. If you want to make sure you have a true "meeting of the minds" for a deal, then you should opt for the more detailed approach. If you are in a hurry and believe that you can work out any issues that come up, then a shorter version may work.

Binding vs. Nonbinding

You need to decide whether you want the letter of intent, or certain provisions of the letter of intent, to be binding or nonbinding. What obligations in the letter of intent are intended to legally bind the parties? You want to be extremely careful here, as the buyer doesn't necessarily want something in the letter to bind him to move forward on the deal. Typically, the buyer (and often the seller as well) wants to say that the parties are not bound in any way, except with respect to the confidentiality obligations and perhaps the exclusive negotiation clause.

Click here to view a sample Acquisition Letter of Intent that illustrates some of these points.

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