If you are currently looking into buying a business, or selling your own, you may have come across the term “letter of intent”.
What is a letter of intent?
A letter of intent sets out the buyers’ and sellers’ intentions regarding the sale of the business. They don’t replace a more formal buying agreement, but are a useful starting point for it.
The letter explains any plans which both the seller and buyer need to know before confirming the sale.
How does a letter of intent benefit everyone?
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.
This might show how the buyer will fund the purchase, for example. If there’s more than one potential buyer, this might help the seller choose the best, safest deal.
It enables them to review the buyer’s financial position and business plans before making a final agreement.
A letter of intent is also useful for buyers, giving them a chance to learn more about the business and identify any issues. It also protects them from 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. Essentially, if the buyer and seller agree it’s legally binding, then it is.
In the letter there should be information about cancelling the deal, and whether it can be done afterwards or not.
Things to include in a letter of intent
The structure of the letter depends on the types of business it involves. Typically, most letters of intent include:
Introduction, where you introduce the deal taking place with a statement of what is for sale.
Identification of parties, where you identify in writing who the “Buyer” and “Seller” are so that there is no confusion throughout the letter.
Contingencies outlining any conditions to satisfy before reaching an agreement. The most common contingency is whether the buyer receives funding 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 are also 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, deciding not to buy it and then starting 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.