This article are provided for information purposes only, and are not intended as legal advice.


Purpose of a letter of intent when you buy a business

October 2nd, 2008

Once you have found your ideal business that you want to purchase, you will issue a letter of intent.  Usually this is a non binding document which identifies in generalities what you are buying and how you are valuing assets like inventory. It often talks about if you are buying the assets or shares of the business, if there is a deposit given with the letter of intent.  If you are conducting due diligence and you discover something that will cause you to abort the purchase of the business, will you get your deposit back? Who has the deposit, your lawyer, the vendor’s lawyer?  Those details should be specified in your letter of intent.  Many people try to do the letter of intent without using a lawyer to save costs.  That may work if nothing goes wrong but in my example that I gave above, if you abort the transaction, does your document say that you can get your deposit back without having to go to court? 

 

Here is a list of some items which could be in letter of intent – please note that this list is not an exhaustive list.  We do not provide legal advice and we disclaim all liability for the information provided in this blog.  You should contact your lawyer and go over the letter of intent with your lawyer

 

– if you are buying assets or shares of the company

– estimated purchase price or formala to calculate the final purchase price

-deposit – is that included with the letter of intent and the terms and conditions surrounding the deposit

– summary of conditions to be completed before purchase and sale is completed for example, length of time of due diligence, if you need to contact suppliers or customers, if you are allowed to talk to senior staff, what conditions can you abort the purchase – if it is raining today is not a valid condition to abort a transaction, you should specify why you can abort and if those conditions exist, you can get your deposit back

– do you need any inspections for example from the fire department, the health department prior to closing.  If there are deficiencies, who is responsible for fixing them or does the deal abort?

– is there going to be a non competition agreement?

– what do you have to do to waive the conditions in the letter of intent in order to proceed, do you need to send them a legal letter saying that you are waiving all the conditions?

– once the conditions are completed, the purchaser’s lawyer starts to prepare the purchase and sales agreement, once completed, the vendors lawyer reviews and the two lawyers work together to come up with a mutually acceptable document

– do you close as soon as the document is signed or do you wait for the month end?

 

These are a few ideas what can go into a letter of intent but it is by no means an exhaustive list.  The laws vary in each province and state and country therefore it is imperative to seek legal advise so that you understand the legal implications of signing a letter of intent.   


Filed under: valuation of a business — Gary Landa @ 11:11 am


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