
I recommend that as many of the anticipated deal terms as possible be outlined in a LOI. Without covering terms in more detail there is a significant risk that the parties may develop substantially different expectations, leading to the deal breaking down and terminating after due diligence is completed and binding purchase agreement negotiations begin.
Some of the deal terms that I usually suggest be included in a LOI include:
- amount of cash paid at closing
- amount and terms of any seller carried financing
- amount and any contingencies related to external financing
- the terms and amount of any anticipated earn-out
- whether the transaction will be structured as a stock sale or an asset sale
- a description of any assets that will be excluded from the sale
- whether current assets will be the property of the seller or the buyer
- whether current and long term-liabilities will become obligations of the buyer or whether the business will be transfered unencumbered by any current or long-term liabilities
- the time commitment, nature, and any compensation related to a training and transition period
- any on-going future support that the seller will provide
- the general terms of any seller employment contract
- the general terms of any non-compete agreement anticipated
- financing contingencies
- due diligence deadline
- the date by which a binding purchase agreement must be drafted
- the date by which a binding purchase agreement must be executed
- the closing date
This list isn't comprehensive and can vary from one transaction to another, but the primary take-away should be that more detail on significant deal terms and the business sale process will help prevent misunderstandings and get a business sale transaction to the finish line.