Considerations in Selling Your Business - Part 9: Letter of Intent
- Created: Friday, 14 October 2016 00:00
by Patrick B. Mathis, Shareholder at Mathis, Marifian and Richter, Ltd.
Letter of Intent
Once the parties have reached an agreement as to the essential terms of the transaction, whether orally or through a written term sheet or correspondence, in most cases the next step is a letter of intent, or LOI. While not as detailed as the final definitive agreement between the parties, the intent letter outlines the essential terms of the deal.
For example, an LOI generally includes:
- The structure of the anticipated transaction, i.e. an asset purchase, stock sale, or merger.
- The sale price and structure of the payments, i.e. cash at closing, deferred payments, contingent payments (i.e. based upon post-closing revenue or other contingencies), stock given in consideration or other forms of payment.
- Ancillary agreements such as employment and non-compete employment agreements with key employees, leases of seller/owner property or the purchase of property not owned by the business.
- Provisions for the buyer’s continuing due diligence review.
- A period of exclusivity as the parties work toward the final agreement during which the seller agrees not to solicit or negotiate with other potential buyers.
- A provision that the parties will negotiate with a good faith agreement but that the agreement is non-binding until a final agreement is reached.
- A confidentiality provision whereby the parties agree not to disclose the anticipated transaction until a final agreement is reached.
The letter of intent serves as an outline of the parties’ understanding of the terms of the deal and allows the parties to move forward to draft a definitive agreement while the seller continues to conduct detailed due diligence and contingencies such as preapproval by regulatory agencies.
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