Before you can begin the process of purchasing a business one side of the transaction or another will likely seek to have the purchaser issue a Letter of Intent(LOI).
A Letter of Intent is typically not a binding contract to purchase the business but it contains several binding terms that provide protection to both the purchaser and the seller while each side evaluates the transaction. The purpose of the LOI is to allow the purchaser sufficient access to the seller’s business so that he can evaluate the merits of the deal while also ensuring the seller that his interest is not for nefarious purposes and that any confidential information will remain secure even after disclosure to the purchaser.
The Letter of Intent commonly contains the following terms: a statement of the purchaser’s interest in the business; a statement of the seller’s intent to sell the business; the basic terms and method of the transaction; an exclusivity clause; a confidentiality clause; and a closing date.
Basic Terms and Method of the Transaction. This section will describe how the purchaser envisions the transaction taking place. For instance, it will identify if the buyer will purchase the company with stock or cash. It should also clearly delineate which portions of the seller’s business are under consideration if the buyer is not purchasing the entire company. The LOI may also identify any conditions required by either side prior to consummating the transaction.
The Exclusivity Clause. This clause is about protecting the purchaser. The due diligence process when evaluating the merits of purchasing a business can be quite expensive. The costs for attorneys, accountants, and other professionals can be quite high. This clause provides the purchaser protection because it allows him or her to go through that process, expend the funds necessary to get a proper evaluation of the transaction, and rest secure in the knowledge that the he or she cannot be out-bid buy a subsequent purchaser.
The Confidentiality Clause. This clause is about protecting the seller. Businesses thrive and survive on proprietary information, trade secrets, and confidential techniques for bringing more value to the market with their product. The obvious fear is that someone might feign the role of a purchaser in order to get access to a potential seller’s confidential information. A properly drafted confidentiality clause is the answer to that concern.
A Closing Date. This is a key component of the Letter of Intent that I think is sometimes taken for granted. Including a specific closing date serves several purposes. First, it provides finality and forces the purchaser to make a decision by a certain date or negotiate an extension with the seller. Second, it relieves the seller of a continuing obligation to cooperate with the purchaser’s due diligence efforts. Third, it will often include a description of the place and method for closing the transaction. This prevents, or at the least provides contrary evidence to, a claim that the transaction was closed via a different inadvertent method by either party.
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