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Letter Of Intent

Tags: buying a business, deal structures, escrow bulk sales, legal issues, selling a business

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What does the buyer of a business do when he or she has found an interesting business for sale and wants to be first in line to check it out it more carefully, and--if it proves to be a good opportunity - first in line to purchase it? An effective strategy is to submit a letter of intent to the owner. It says, in effect, that if the business looks good after a due diligence examination, and if other contingencies--such as obtaining a loan for some of the purchase funds--can be met, the buyer will put up the money and take over the business. Ordinarily, the letter specifies a total purchase price the buyer is willing to pay, but it may not include detail about whether the seller will be required to help finance the deal by carrying back part of the price. Instead of reciting specific terms of a final deal, the letter of intent usually says, "mutually agreeable terms yet to be determined."

Since the letter is meant to get a commitment from the seller, the buyer's objective is for the seller to also sign it, indicating agreement with the buyer's intent. With the seller's agreement, the buyer has the expectation that the seller will not accept any proposals, either letters of intent or purchase offers, from another party, until the buyer has had a chance to evaluate the offering and decide whether to buy it.

The typical letter of intent is a single page document covering just an outline of a proposed transaction and the deadline for signing a final agreement. Usually excluded are terms of a carry-back promissory note the buyer would give the seller in lieu of some of the cash making up the purchase price. Also missing are details of a training agreement, duration of a non-compete covenant, allocation of purchase price or some common contingencies, such as the buyer being able to obtain a satisfactory rental agreement for a business operating on leased property.

There is considerable legal question about the enforceability of a letter of intent. If the seller were to agree to such a letter, then sign a purchase/sales contract with someone else, a court cannot force the seller to rescind the contract in favor of an agreement based on the letter of intent. But the seller may be liable for damages.

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