Letters of Intent

So you have worked out a tentative deal to sell or purchase a business. Now what? Although it isn’t an absolute must, a Letter of Intent may be the best next step. A Letter of Intent is essentially a written document that sets out the basic terms of the deal including the price, payment terms, structure of the deal, the proposed closing, and more.

What goes into a Letter of Intent?

Letters of Intent usually contain the most important business terms of the deal such as the price that will be paid for the business. Payment terms such as all cash or part cash part promissory note is also a common provision in Letters of Intent. Whether the deal will be an asset purchase or a stock transaction may be covered. If the deal is an asset purchase are there any assets that will be excluded or any liabilities that the Buyer will be assuming, such as an office lease? The anticipated closing date may also be included.

From a buyers perspective one of the most important provisions in a typical Letter of Intent is the “no shop” clause which essentially prohibits the seller from fielding other offers during a certain period of time. This clause protects the buyer from expending time and resources in preparation for the transaction and then having the business sold out from under them to a third party that presents a better offer.

From a sellers perspective they may want to include a provision making the Letter of Intent “binding” providing the buyer with a limited ability to walk away from the deal. This provision protects a seller from expending their valuable time and resources just to find out that the buyer was just kicking the tires.

What are the benefits of a Letter of Intent?

There are many benefits that a Letter of Intent can provide. These include:

1. Clarification of the important deal terms;
2. From a buyer’s perspective the “no shop” clause;
3. From a seller’s perspective a “binding” provision;
4. Provides a time table for the transaction; and
5. Set out the expectations for the buyer’s due diligence process.

The attorneys at General Counsel Consulting have many years of experience in drafting Letters of Intent and other purchase documents. If you have worked out a deal to sell or purchase a business call General Counsel Consulting for assistance in drafting or reviewing your Letter of Intent.

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