The document that a business buyer submits to a seller to signify interest in acquiring a business is usually a Letter of Intent (LOI). A LOI is a non-binding expression of interest and seeks to gain a general understanding between a business buyer and seller on the primary deal terms. While non-binding, the LOI is, in essence, the offer. The thoroughness of LOIs vary greatly. Some buyers and business brokers use a basic LOI that is limited to saying something like “This letter is a non-binding expression of interest for John Doe to acquire ABC, Inc. John Doe wishes to conduct due diligence, and if there are no adverse findings, then he will formalize his interest in a binding purchase agreement.” I strongly advise seller clients against agreeing to such a simple and vague LOI.
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 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 a portion of, or all, 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 is that detail on significant deal terms and the business sale process should be included to help prevent misunderstandings and get a business sale transaction to the finish line.