If you are thinking about buying a business, it is important to consider the steps involved in the sale process. One of the most important parts of this process comes after a buyer and seller have agreed to the basic terms of a business sale. The next step in the sale process is for the buyer to submit a letter of intent (LOI) to the seller. Submitting a letter of intent shows the seller that you are a truly interested buyer, and while generally non-binding, outlines the overall terms of the agreement.
The use of an LOI benefits both the buyer and the seller throughout the process. One key reason for this is that submitting an LOI ensures that both the buyer and seller are on the same page. The LOI will outline the overall terms of the deal, and will provide a pathway for the next phases of the sale process.
Some important aspects to include in an LOI are:
- Valuation and payment
Typically, an LOI will indicate what is included in the sale of the business (whole business, part of operations, etc.), and how it will be valued. While a buyer may have already made an offer at a specified price to the seller, an LOI should discuss whether the purchase price is subject to change, and what adjustments will be made before the sale is closed. It is also important to outline how the purchase price will be paid (immediately, over time, etc.).
- Key conditions
In addition to the purchase price and payment structure, an LOI should also include any conditions that are required to be met before the sale is closed. Common examples of conditions included in an LOI would be obtaining financing, conducting satisfactory due diligence, or providing financial statements. There may also be conditions in the LOI that are asked of the buyer, such as an agreement not to terminate employees after the sale or an agreement to take on customer/supplier obligations.
- Confidentiality
Because the due diligence phase will involve analyzing confidential information and documents relating to the business, it is important that an LOI includes provisions to ensure this information is kept private. Depending on the business being purchased, it may be necessary to consider using a separate non-disclosure agreement to ensure information is not divulged.
- Timeline
It is generally a good idea to outline a deadline for closing the transaction. By doing this, an LOI can assist in making sure the due diligence and negotiations take place in a timely manner. In addition to a deadline, it is wise to allow both parties to amend this date, especially if delays occur that are out of both parties’ control.
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