Letter of Intent for Business Acquisition
When you do a business deal like sale or purchase of a business, it can take a long time to complete. It is because there will be a lot of steps and documents that you have to complete. From the documents, the most important is a letter of intent that drives the process through a general understanding up through the end of the deal.
What is a letter of intent? You may not know the form of this letter and what it is. A letter of intent clarifies the intentions of the people who involved in the deal. This letter is also called a memorandum of agreement or a memorandum of understanding. It starts and sets out the process toward a final , firm agreement to purchase a business. In the letter of intent, it will describes the detailed information of important things for the buyer to make an informed decision for buying the business.
This letter puts the buyer in the position of a right of first refusal. The seller agrees to put the buyer first in line to purchase the business even if other potential buyers should come up. It will protect the buyer from having to spend a lot of time and money investigating a business only to have the owner sell to someone else at the eleventh hour. From the point of view of seller, the letter will give the seller some assurance that the buyer is serious and it permits the seller to review detailed information about the financial position and business experience of the potential buyer.
Then, when is this letter created? The letter of intent is created and signed at specific point in the process of purchasing or selling a business. Usually, it is written when both parties agree that they want to complete the deal and they are ready for more detailed information to change hands so they are able to start progressing toward a closing date. This letter is not a final agreement and also not a purchase agreement. But, it outlines the specific actions and steps that the parties will take to get the purchase agreement.
When you write the letter of intent, make sure that you use the KISS principle. What is it? KISS means Keep It Short and Simple. You have to avoid complicated legal language. Then, keep it general. How is the structure of a letter of intent? The structure of letter depends on the specific type of business deal you are involved in. Generally, the structure of letter will include:
- Introduction. In this part, you have to write the purpose of the document, descriptions and identifications of the parties involved and the part of transaction. It also contains of date of document becomes effective, description of business and various terms.
- Transaction and Timing. It includes a general description of the transaction such as type of business deal, and a purchase price.
- Contingencies. There is a common contingency in business deals which is the buyer has to complete the due diligence process with all issues resolved.
- Due Diligence. The goal of due diligence is to bring everything out in the open so there are no surprises. It includes checking records, legal documents, verifying tax and legal documents, checking for liabilities or pending litigation and asking a lot of questions.
- Covenants and Other Binding Agreements. Most business deals include sub-agreements named restrictive covenants and it is usually binding.
After you create the letter, you and your partner business must sign the letter of intent after they have agreed to its terms and have their signatures notarized.