What Should Be in A Letter of Intent to Buy or Sell a Business?
Whether you are buying or selling a company, you should give careful consideration to the letter of intent (LOI). People often make the mistake of rushing through the LOI or being vague on details on the assumption that details can be worked out later. Beware: Leaving out critical provisions might be costly over the long run. It is easier to include all the terms you care about in the LOI than to get your counterparty to agree to significant changes later. A well-crafted LOI walks the fine line between covering the important points while not getting mired in minutiae.
Here are some essential items that you should include in your letter of intent:
Asset or Equity/stock Sale?
Specify whether the proposed sale will be a sale/purchase of assets or of equity interests (stock for corporations or LLC interests or units for LLCs). Discuss this with the other party as early as possible. Whether you choose to structure the deal as a sale/purchase of assets or of equity will have significant tax and risk implications for you and for the other party.
If the deal will be structured as an asset sale, itemize the assets to be sold/acquired and allocate a portion of the purchase price to each. Allocation of the purchase price can affect tax liabilities for all parties to the transaction. List all assets (and liabilities) which the seller is not including in the sale (or which the buyer does not want to acquire).
It is helpful to list the liabilities which the buyer will be assuming as well as the liabilities which the buyer will not be assuming or acquiring.
Purchase Price and Payment Method
Be sure to include both the purchase price and, if possible, the method used to arrive at the purchase price. If the method is not agreed upon, the due diligence process could invalidate one or more of the assumptions used to calculate the purchase price. If both parties agree on a method, it will be easier to adjust the purchase price if due diligence reveals some changes to the assumptions. Include working capital adjustment provisions.
State the method of payment and payment terms. Will it be a cash deal? Will the seller hold onto a promissory note issued by the buyer for a portion of the purchase price or retain an interest in the company until paid in full? Include the basic terms of seller financing or earnouts if applicable.
Include the anticipated closing date. List significant closing conditions, such as whether the deal hinges on the buyer obtaining financing.
The Target Company’s Principals and Employees
Describe the basic terms of employment for the selling company’s principals after closing. How long will the principals provide consulting services to the buyer after the sale? What will their titles and salaries be?
Include non-compete agreements for the seller(s) to sign. For example, the seller might agree to refrain from competing with the sold company for three years after the sale or within 50 or 100 miles of the sold company.
Indicate what will happen to the company’s employees after the sale. Will they continue to work at their current jobs or will they be hired by the buyer through a separate or new company?
Due Diligence
Outline the due diligence process. The seller will want to specify all items to be retained by the seller pending execution of the sale. Such items might include sensitive customer information. Even if a comprehensive non-disclosure agreement is signed at the beginning of negotiations, either include non-disclosure provisions in the LOI or incorporate the previously signed NDA into the LOI to protect the seller’s confidential information.
Be sure to include a “good faith” clause that prevents any of the involved parties from using the negotiation and due diligence process solely to extract information about the other party or their company.
Identify who will be required to provide representations and warranties. Will it be the selling entity, its owners or both the entity and its owners? Outline the basic indemnification terms.
Other Things You Should Include
Include an exclusivity clause or no-shop provision. This can be mutual, where the seller agrees to not consider other buyers while negotiations are in effect or for a stated period of time and vice versa. Provide enough time to complete due diligence and to get definitive documents drafted, negotiated, and signed.
Specify who will pay deal expenses in the event that the deal fails to close. If you are the seller, you want to make the buyer pay his or her own costs, especially if the deal fails to close.
Put in boilerplate provisions such as governing laws and jurisdiction disputes.
Add anything that is unique to the target company and that might not be found in boilerplate provisions.
Last but not least, include language that clearly identifies the document as a letter of intent (LOI) and not a purchase contract. List all binding and non-binding provisions. Generally, the confidentiality provisions and the exclusivity or no-shop provisions should be the only binding clauses, though the allocation of expenses may also be binding.
Why You Should Work with An Attorney
A Carefully Drafted LOI Paves the Way for A Successful Acquisition or Sale. the Scope and Complexity of The Legal Issues Applicable to The Various Provisions of The Document Make It Essential that You Collaborate with An Experienced Attorney when Putting Together the LOI.
Isaiah Cooper Provides a Free Consultation, a “business Strategy Session,” Before Every Representation to Ensure Clients Understand how Legal Issues Can Impact the Future of Their Companies.
If Isaiah is Not the Right Attorney for Your Company, He Will Find You an Attorney with The Expertise You Need. Just Call His Office to Schedule Your Free Consultation.