Letter of Intent

Once you have a general agreement with the buyer as to the price and terms of the sale of your business, the buyer usually drafts and signs a non-binding letter of intent. The letter of intent lays out the general terms of the deal, and, if signed by the seller, it indicates that both parties intend to move forward in completing the transaction. Generally, at the time the buyer submits the letter he or she will also make a monetary deposit on the purchase price, similar to the earnest money used in a real estate deal. If the deposit is large, the seller may agree to a "no-shop" agreement, which prevents the seller from further marketing the company. However, the letter is usually nonbinding in the sense that at any point, negotiations can be broken off by either party, and the buyer's deposit will be returned.

Once signed and accepted by the seller, the Letter can be shown to third parties such as lenders and stockholders as evidence of the seriousness of the parties. The buyer will begin a thorough investigation of all aspects of the company (known as "due diligence "), and the letter should give the buyer permission to contact your lawyer, accountant, banker, etc., to find out more about your operation. In the meantime, your respective lawyers can begin to hash out the contractual language of the purchase agreement.

There is one part of the letter of intent that should be binding on the purchaser, and that is the section in which the buyer promises to keep confidential the fact that negotiations are proceeding, and also promises not to disclose any information learned during the investigation or negotiations. This provides you with some protection if the deal falls through. However, we recommend that you don't rely solely on this agreement — it's still a good idea to keep the most sensitive trade secrets or other information to yourself until you are sure that the buyer will sign the contract.

Multiple letters of intent. Sometimes, business brokers will conduct a controlled auction in which they will describe the seller's company to a number of likely purchasers. They will solicit bids in the form of letters of intent, to be presented to the seller on a specified date. In this situation you may receive several letters of intent, without having done any significant negotiations with the buyers. You'll need to work with your broker to find out as much as you can about the potential buyers and then choose one of the letters to accept. In these situations, buyers generally make their best offer the first time, so it's usually best to accept one, without attempting to continue to pit buyers against each other or expecting them to make additional offers and counteroffers.

Do you need a letter? The letter of intent stage can be skipped if you know your purchaser well (for example, the buyer is your child or a key employee), or if the deal is a very small one and it looks as if you can move directly on to negotiating the purchase agreement. However, even if you and your buyer decide to dispense with the formal letter, we would still recommend that you have the buyer sign a confidentiality agreement before moving on to thorough due diligence.