Letter of Intent to Purchase Business Assets
A letter of intent to purchase business assets sets forth the terms that a buyer and seller have agreed on in relation to a sale of business assets.3 min read
A letter of intent to purchase business assets refers to a document that sets forth the terms that a buyer and seller have agreed on in relation to a sale of business assets.
The buyer and seller may create a contractually binding letter of intent and specify detailed terms that will be included in the final purchase agreement. Alternatively, a letter of intent can be an informal agreement that states only the most important terms to a transaction, leaving the remaining terms to be specified at a later time. Whether it is formal or informal, a letter of intent can be a beneficial tool for both buyers and sellers.
Benefits of Creating a Letter of Intent
Save Time and Money
For most buyers and sellers, saving time and money is the main reason for utilizing a letter of intent. Before conducting due diligence, which usually requires significant resources, a buyer and seller may identify the main terms they agree upon. By doing so, they will be less likely to waste their time as they pursue the transaction to closing.
Facilitate Due Diligence
A letter of intent enables a buyer and seller to set a time frame and create a roadmap for conducting due diligence. This can help prevent surprises and potential disputes in the future. For instance, a buyer may expect the seller to provide his or her financial records during due diligence, but the seller may resist full disclosure. If they have not agreed on these terms earlier, the process will likely be delayed as they negotiate which disclosures should be made.
The buyer must expend substantial resources to conduct due diligence, such as hiring attorneys, accountants, and other professionals to evaluate the viability of the business. As such, he or she will want to make sure the seller will not engage in negotiations with other buyers as the transaction progresses towards closing. The buyer can discourage or prevent the seller from negotiating with other buyers by including a no-shop or non-compete provision in the letter of intent.
A seller is usually required to provide sensitive materials to a buyer, which may include trade secrets, financial records, internal communications, and employee-related information. A buyer, on the other hand, may want to keep his or her intention to purchase business assets a secret. A letter of intent may include binding language that prevents both parties from disclosing sensitive materials exchanged during the sale process or the terms of the transaction. It may also require the parties to enter into a separate non-disclosure agreement.
Facilitate More Focused Negotiations
In general, a well-written letter of intent creates a solid foundation for future negotiations by highlighting terms that remain outstanding. It provides a head-start towards the final transaction, making the whole process more effective, efficient, and less costly.
Similar to other contracts, a letter of intent may contain specific remedies that the parties can avail of if either of them breaches the terms of the agreement. Such language assures both parties that their rights will be honored, which can prevent a waste of resources and time.
Characteristics of a Solid Letter of Intent
- Comprehensive letter of intent: A buyer and a seller have different strategic reasons for creating a letter of intent. Generally, a buyer will want to have as general and short a letter of intent as possible. However, it is better for a seller to have a more comprehensive letter of intent.
- Exclusivity clause: A seller usually has maximum leverage during the process of negotiating the letter of intent. His or her negotiating power will likely diminish from that point onwards because most letters of intent in private-company transactions contain an exclusivity clause. This clause prevents the seller from speaking to another party about a possible sale.
- Mutual benefit: When creating a letter of intent, a buyer will want to maintain maximum flexibility so that he or she can draft a purchase agreement that is more favorable to him or her. Therefore, instead of specifically addressing major topics in the letter of intent, the buyer usually prefers to defer the issues by using stopgap wording to disadvantage the seller. One way to do this is to leave issues as “mutually agreed between the buyer and seller in the final purchase agreement.”
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