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The Importance Of Formalizing Your Intentions In A Written Letter Of Intent

Aug 17, 2007
Not having a properly drafted Letter of Intent may lead to loss of business as well as ambiguity in setting out the proposed terms of an intended sale. After all, when thinking of buying a business, the intentions to buy should be clearly set out at the very beginning. To get the best out of the proposed deal, it is wiser to obtain a well-prepared, complete and authentic Letter of Intent rather than use untutored and inexperienced methods to draw up the Letter of Intent. This will ensure the smooth transition of the assets of the Business from the Seller to the Purchaser. Its importance as a preliminary document in a proposed sale is too great to treat it with inadequate attention.

What is the Letter of Intent?

The Letter of Intent states an understanding of the proposed terms of the impending sale between the two parties. It is not merely a preliminary document that defines the terms and conditions of a proposed sale but is also not a legally binding contract nor is it enforceable in a court of law. It does, however, specify the rights and obligations of the parties concerned. The parties are only stating that they intend to enter into an agreement, the contents of which are covenants that will later bind the parties together in their proposed business acquisition.

What are the Contents of the Letter of Intent?

The Letter of Intent shall specify whether the Purchaser will be buying up all or a substantial amount of the assets of the Business and will, in addition, only acquire those liabilities that are part of the operations of the Business subsequent to the closing date.

The price paid and the price adjustments will be determined by the audited or un-audited balance sheet figures of the Business on a specified date and these shall focus themselves on the adjustments that arise after the closing date due to changes in the accounts receivable and inventories of the Business from a specified date up until the closing date.

Seller's obligations and legal position

The Seller is obliged to continue operating the Business in a manner that is consistent with past practice and that he shall facilitate the Purchaser's endeavors in obtaining finance from third parties. However, neither the Purchaser nor the Seller is under any obligation to complete the acquisition of the Business until and unless the Purchase acquires all permits, certificates, permissions and approvals as required ensuring the correct operation of the Business by the Purchaser. In addition, the Purchaser should also have completed a due diligence investigation and satisfied himself/herself in this regard.

Due Diligence

The Seller will facilitate the Purchaser's due diligence investigation by providing all books, records, contracts, access to important employees as well as all other relevant information of the Business.

Confidential information and agreeing not to use it for competitive purposes

Matters concerning the due diligence investigation are to be treated in confidence and the Purchaser will not either directly or through his representatives divulge any such information. The Purchaser is also bound not to use the information gained through due diligence investigations in competition with the Seller even if the proposed sale falls through.

No solicitation of employees of the Business by the Purchaser

Till the proposed sale materializes, or in the event that such sale does not materialize, the Purchaser shall abstain from trying to recruit or solicit the services of any employee of the Business.

Seller will not deal with other bidders

Till a date, as specified in the Letter of Intent, or till such time as the Letter of Intent stands terminated, the Seller is under an obligation not to deal with any other party in any respect whatsoever.

Other Terms and Conditions

This Letter of Intent sets out the conditions of the proposed sale and is dependent upon the signing of a definitive agreement by and concerning the Buyer, Seller and the Company. The definitive agreement shall hold the schedules, representations, covenants, indemnities and all other provisions according to the terms and conditions of the Letter of Intent and following all standard conventions in regard to all usual and applicable commercial practices.
About the Author
Wade Anderson is a CPA and operates DigitalWorkTools.com

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