A letter of intent sets out everyone’s intentions regarding the transfer of a business, so there’s a good chance you’ll come across the term if you’re buying or selling a business.
In this article we’ll explain how a letter of intent is used during the sale of a business, and what it might include.
How does a letter of intent benefit everyone?
They don’t replace a more formal buying agreement, but they can be a useful starting point for it. The letter normally goes over any plans or considerations which both the seller and buyer need to know before confirming the sale.
Issuing a letter of intent demonstrates that a buyer is serious, which some sellers find reassuring. As well as intent, it also explains what solid plans the potential buyer has made.
Choosing who to sell to
A statement or letter of intent might include details around how the buyer will fund the purchase, or give an overview of their business plan. If there’s more than one potential buyer, this can help the seller choose the best, safest deal which most aligns with what they want to achieve from the sale.
Minimising risk
A letter of intent is also useful for buyers, giving them a chance to learn more about the business and identify any issues. It can also minimise the risk of them spending time investigating a business, only for the seller to choose a different buyer!
Is a letter of intent a legal contract?
This depends on the content of the letter but usually, if the buyer and seller agree it’s legally binding, then it is. The letter should include information about cancelling the deal, and whether it can be done afterwards or not. It’s a bit like putting in an offer on a house, but making it clear that it’s subject to the outcome of any searches and surveys.
What should a letter of intent include?
The structure of the letter depends on the types of business it involves, but there are usually some common similarities.
- Introduction: Explain what transaction or deal you expect to take place, and make it clear what is for sale
- Identification of parties: Confirm in writing who the “Buyer” and “Seller” are, to minimise any confusion or issues
- Contingencies: Outline any conditions to satisfy before reaching a final agreement. The most common contingency is whether the buyer receives any funding they need to purchase the business.
- Due diligence: Where both the buyer and seller cover the finer details of the deal so there aren’t any nasty surprises hidden in the paperwork.
- Binding agreements: These are sometimes added as a result of additional agreements during the negotiation. For example, a non-compete agreement would stop a buyer from learning about a business, but deciding not to buy it only to then go on and start up a competing company. Another example is a nondisclosure agreement between both parties to keep everything confidential.
The wording of a letter of intent is incredibly important, and we always recommend getting legal assistance to avoid any possible confusion!
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