When Buying an Existing Business, Here’s What You Need to Know About a “Letter of Intent”

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What is a Letter of Intent and how does this help (or hurt) you when you want to buy a business? As soon as a buyer and seller have come to an agreement on price and major terms, a letter of intent may be prepared. This document precedes the more formal and detailed purchase agreement. It clearly states what each party has agreed to and states that this is all contingent upon the signing of the purchase agreement. It should include price, terms and access buyers will have to sellers’ business premises, records, employees, customers and suppliers. Be sure to consult with your professional advisors before drafting and using such an agreement.

Some buyers or sellers may not be 100% certain of the deal at the time of signing the letter of intent. They may request that conditional language be included such as: “This Letter of Intent shall be non-binding until a more formal purchase agreement is signed.” Be careful. Just because you have conditional language inserted, doesn’t mean that a contract hasn’t been formed. If the buyer, for example, in good faith takes all of the steps required under the letter of intent, you as the seller may be precluded from deciding at the last minute not to sign the purchase agreement. There are plenty of court cases where “non-binding” letters of intent have been enforced. The point is, if you go through the negotiation phase and reach an agreement, assume that you are buying or selling the business when you sign the letter of intent. If you are not completely sure about the whole deal, then don’t sign the letter of intent. Don’t create the legal liability for yourself to buy or sell if that’s not what you want to do. It is not fair to you and is certainly not fair to the other person across the table who has likely spent thousands of dollars in attorney, accountant and due diligence fees to get the negotiations to a letter of intent threshold.

That said, there are numerous contingencies that can be placed in a letter of intent (or a purchase agreement) that will protect the buyer. These conditions or precedents to a purchase include the following:

1.   Review of the seller’s books and records to the buyer’s satisfaction.

2.   Lining up suitable financing to the buyer’s satisfaction.

3.   Reviewing and acceptance by the buyer of all lease and purchase agreements.

4.   The ability to obtain necessary insurance to the buyer’s satisfaction.

5.   The occurrence of no material adverse change in the seller’s business.

As a general rule, the time period for a review of the books and records will be a fixed and limited time, i.e., 15 or 30 days. If you as buyer are not satisfied after your due diligence investigation you may want to send formal written notice within the time period to the seller of your intent to cancel the sale. You may want your attorney’s assistance in preparing this notice letter. Depending on the terms of the agreement, the cancellation letter may perhaps generally read as follows: “Based upon my review of your books and records and pursuant to the 30-day contingency for such review, I have decided not to purchase the business and thus withdraw my offer to purchase dated ………….” Such a letter will protect a buyer from a desperate seller willing to use any argument to force a sale.

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