In this video, Attorney Kari Lutringer talks about using a letter of intent in the sale of a business. The sale of a business can be a complex process and a letter of intent can help the parties document their responsibilities in the transaction. Call or text 800-929-1725 for an appointment at any of our offices in Wharton County, Matagorda County, or Fort Bend County.
Summary of Using a Letter of Intent in the Sale of a Business
Hi there, my name is Kari Lutringer, and I’m an attorney at Wadler, Perches, Hundl & Kerlick. And today, I’d like to talk a little bit about letters of intent.
Now, buying or selling a business can be a daunting undertaking for anyone, no matter if it’s your first transaction or if you’re a veteran at the process. Typically, the way the transaction will begin is buyer and seller will get together, strike a deal, come to an agreement upon the basic terms, shake hands, and decide to go on down the road. So the typical next question is, what do we do to document our agreement?
What Is a Letter of Intent
A letter of intent is one of the best tools that I’ve found to help expedite the negotiation process and get everyone on the same page in terms of the agreement. Sometimes it’s also called a term sheet. A letter of intent is a document that is non-binding in most respects, not all. And we’ll talk about those provisions that are typically binding. But for the most part, it will lay out the basic terms of the transaction. Then there are no surprises when the purchase agreement is drafted, and both parties have a pre-agreed understanding of the terms of the deal.
So the types of deal terms that will be covered are, for one, the structure of the transaction. Will it be treated as an asset sale or as an equity sale? What’s the purchase price, and how will it be paid? Is it a cash deal? Is there some financing component through a third party, or is a seller going to finance any portion of the transaction? How will the purchase price be allocated among the assets if that’s the preferred structure? Is the buyer expecting the seller to make any specific representations or warranties?
Representations and Warranties
Reps and warranties are statements that the seller will make to the buyer about the quality of the company and the business. So there’ll be things that cover ownership. The seller will say that they own the company or the business and have the authority to sell or enter into the transaction. They’ll make representations and warranties about the quality of the assets in terms of condition, whether or not there are any outstanding loans or liens, whether there’s any litigation pending against the company.
Are there similar types of issues that any buyer will want to know about before they decide to close on a transaction? In addition, there’ll be any closing conditions identified that the parties wish to agree upon.
So, for instance, if permits need to get obtained, or if loans need to be paid off, or certain agreements need to be made with customers, the things that need to be handled before the buyer is going to be willing to sign off. Then what sort of goes hand in glove is what will allow the buyer to terminate if these closing conditions aren’t met or if the other ones want to back out of the transaction.
You might want to also cover matters that deal with employees. So, for instance, are employees going to continue to be employed by the new buyer? Are there certain key personnel that need to stick around for the buyer to go through with the transaction? In addition, the buyer often wants the seller to sign a non-compete agreement where they agree to not compete with the business that they are selling for some period of time or not solicit customers or employees of the company after the closing of the transaction.
Due Diligence Process
In addition, are there other logistical matters related to the transaction that will need to be addressed? So, for instance, there might be a due diligence process, which is the process in which the seller opens up the books and allows the buyer access to the company records to do their own investigation as to its quality. How is that going to be conducted? Who’s going to have access to the materials? Is there going to be any kind of confidentiality requirement required? What personnel need to be available to answer questions of the buyer?
Who Pays for What
And then also, the transaction expenses are usually described as to payment responsibility. So typically, both parties are responsible for their own costs, but that can be negotiated however you like.
Binding Terms in the Letter of Intent
So, as I mentioned, the bulk of the information in the letter of intent will be non-binding. However, there are a couple of provisions that are typically binding on both parties, and one of those is confidentiality. So the fact that the parties are negotiating a transaction, that’s typically something that the parties will want to keep confidential. Also, as for any information disclosed to the buyer, the seller will want the buyer to maintain the confidentiality of that information during the period of due diligence and thereafter.
In addition, there’s also typically an exclusivity provision, which basically will prevent the seller from soliciting offers from other buyers during the time that the buyer is conducting their diligence or the period during which the parties aren’t negotiating to close the transaction.
So the letter of intent is not a document that will be required by either party to close the transaction. I do find that a letter of intent is a helpful way to get the parties kind of organized and get a game plan moving forward.
Get the Help You Need for a Successful Business Purchase or Sale
So if you have any questions about what I’ve discussed in this video, or if you’re interested in having us help you put together a framework for a term sheet or letter of intent, we’re happy to help.