Sardar Law Firm

Archive for February, 2014|Monthly archive page

Letters of Intent & Buying a Business

In Entrepreneurs and Social Media on February 2014 at 5:51 pm

We get a lot of requests to meet up and talk business with professionals that want to switch to “business.”  Many times those professionals are looking to buy a business but have not had any experience on how to do so.  So we thought it might be helpful to lay out some tips on the first part of formalizing a deal to buy a business:  the letter of intent (referred, brilliantly, as the “LOI” during conversations).

The letter of intent is not the end of a negotiation to buy a business; in fact, it’s the first step to formalize mere discussions into an actual business deal.  A letter of intent is way to draft out the assumptions and views of both parties regarding the critical elements of the business deal.  It’s a tried and true concept:  getting it on paper is the first path to understanding what you are getting. Note:  remember, the letter of intent is NOT the actual agreement that governs the buy/sell of a business; in fact, it is not an agreement in the contractual sense and should not reflect an agreement (that’s kind of key). 

(Some) Things to include in your letter of intent when purchase a business

First. This is not an exhaustive list.  These are guidelines.

#1:  Mark the document as a Letter of Intent.

The document should be clearly marked as a letter of intent and not a binding contract.  Your lawyer should include such delineating language in the subject, title, or first paragraph of the LOI to ensure that it is clearly stated and not lost in any fine print.  This prevents your LOI from being arguably used as a contract or offer.

#2:  Good faith language. 

Your LOI should include (and some states may actually impose this via statute) the requirement that all negotiations must be done in good faith.  This sounds like an obvious, clearcut idea but “good faith” can be construed in different ways.  When including a “good faith” statement, parse it out and define it.  Or at the very least, define what can be considered “bad faith” to ensure that all parties are on the same page.  For example, your “bad faith” definition can include the barring of the parties from using the negotiation and diligence process as an information collection expedition for competitive purposes.

#3:  Is it a sale of stock or assets.

We’ve discussed before the importance of understanding the difference between stock and asset purchasing deals from the seller’s side.  It is just as important from the buyer’s side of a deal. Your LOI should make it clear what the parties are negotiating for.  This core question is going to be the basis for the deal structure itself, and should be addressed first rather than last.

#4: The purchase price roadmap. 

While the LOI is not an agreement, it should include the potential purchase price as well as what the purchase price is based on.  This purchase price, as well as the under lying assumptions, will be proved or rendered incorrect during the due diligence process.  If the LOI is clear about how the potential purchase price was reached, parties will be able to adjust it better per findings in the due diligence process.

#5:  Payment method and delivery. 

Will it be an all cash deal, a note, or an alternative retained interest deal?  The LOI should state this so that, again, all parties are on the same page.  Make a note of what the payment method will be, as well as the payment delivery method.

Withe letters of intent, the key thing to remember is that while it is not an agreement between to parties for the purchase or sale of a business, it is the first step of formalizing negotiations to enter into a business deal.  Your LOI should address major points of the potential deal to help all parties get on the same page before wasting valuable time.

Questions about letters of intent Email Sheheryar Sardar at sardar@sardarlawfirm.com.

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