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Letter of Intent to Buy a Limited Liability Company



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A Few Key Points on the Letter of Intent – Limited Liability Company

Douglas Bean
by Douglas Bean, J.D.

When you're negotiating the sale of a Limited Liability Company it’s important to use a Letter of Intent. The main purpose is to facilitate the start of a deal so the parties understand the key business and contractual issues involved. While the Letter of Intent is not intended to be a complete listing of all deal terms, being specific about the "big points" can be helpful so that all parties understand the broad strokes of the deal.

Specifically, the Letter of Intent can help:

  1. spell out each party's expectations with respect to the essential terms of the proposed deal, in addition to price, early on in a transaction;
  2. to demonstrate the parties' commitment to the transaction;
  3. to determine who will draft certain documents; and
  4. to set a timeframe for the completion and execution of the definitive agreement(s).

It’s important to remember that a Limited Liability Company is not a corporation nor is it a sole proprietorship, although it shares attributes of both, which is one reason it is such an attractive entity from which to do business. LLC’s have the ease of operations of a sole-proprietorship, as well as the simplified taxes, but also afford the protection from liability afforded by a corporation.

Related: Tax Implications When Selling a Business

Interest in an LLC is held by the "members" and selling the interests in an LLC is governed by the LLC Operating Agreement. There are single-member LLCs, and multiple member LLCs. If the parties intend on selling/purchasing the membership interests in the LLC, the sale agreement should reflect that. It is also important to consult the LLC operating agreement to identify any pre-conditions for the sale of membership interests (if the membership interests are being sold).

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It is also possible to structure the sale of an LLC as a sale of assets only. In this case, only the assets of the LLC (tangible and intangible, as well as goodwill) are being sold. It is also important in this case to investigate the LLC operating agreement to ensure the proper procedure is followed for the sale of assets.

Whether to sell the membership interests in an LLC or its assets is a complicated decision with various business and tax considerations. Which option you choose should be done with the advice of competent professionals.

Related: Selling Business Assets or Shares (a complete guide)

As an expression of your sincerity, commitment and good faith, you should agree not to engage in discussions with other potential buyers during the due diligence and pre-closing period. In return, the buyer may put up a deposit, a portion of which may be non-refundable if the deal fails to close because the buyer backs out through no fault of the seller. It should take no more than a few days to a week to finalize a Letter of Intent. If you can’t get past price and the principal business issues in that period of time, you should seriously consider disengaging and picking up where you left off and either go back to the market or go to your second suitor.

Beware of the buyer who insists on detailed due diligence before getting the letter of intent or deal memo in place. You should be prepared to give them enough information to document their key assumptions, and agree in general terms to a deal based on those assumptions. They will get time to verify their assumptions later. Handing out details like customer lists, employee lists, supplier contracts and similar items can come back to haunt you if the buyer is simply trying to pick your pocket or replicate your business model, and is only using the negotiations to gather information.

Other documents that will, or may, be required during the sale process are:

  • Business Sale Agreement
  • Non-Disclosure Confidentiality Agreement
  • Financial Statements
  • Inventory List with Value Detail
  • Supplier and Distributor Contracts
  • Client List and Major Client Contracts
  • LLC Tax Returns for Past 2-3 Years
  • Building or Office Lease
  • Equipment Leases and Maintenance Agreements
  • Business Licenses, Certifications and Registrations
  • Insurance Policies

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LETTER OF INTENT

INSERT LLC’s NAME

INSERT LLC’s ADDRESS

Dear ___________________________:

The intent of this Letter is to provide a written expression of the mutual interest of the following Parties:

"Buyer(s)": ___________________________

and

"Seller(s)": _____________________________________________

in which Buyer(s) would purchase: OPTION 1: the business assets, OPTION 2: member interests and goodwill, (hereafter referred to as [INSERT LLC’s NAME]) set forth in this Letter from Seller(s). This Letter also outlines some of the terms and conditions that a future agreement would include, as well as the exchange of information and documents that should take place in advance of the future agreement. The future agreement would require further documentation and approvals and the preparation of a definitive agreement which would set forth the material terms and a commitment from the Buyer(s) to purchase and the Seller(s) to sell.

1. Prospective Transaction

The transaction, which the Parties have expressed a mutual interest in, involves the transfer of the OPTION 1: membership interests of, OPTION 2: the assets of [INSERT LLC’s NAME], including, goodwill, and other items the parties may designate, from the Seller(s) to the Buyer(s) ("Prospective Transaction").

2. Purchase Price

The Prospective Transaction would involve payment from Buyer(s) to Seller(s) under the following terms:

OPTION 1: Buyer will make a cash payment of: ___________

OPTION 2: Buyer will make an initial down payment of [INSERT AMOUNT] and sign a promissory note secured by the assets of the business (or other collateral) in a form acceptable to the seller.

3. Liabilities of Seller

Seller(s) would remain liable for any (known or unknown) liabilities or obligations not expressly assumed by Buyer and which arose before the consummation of the final or definitive agreement, and shall pay and discharge all known liabilities and obligations prior to closing.

Buyer expressly assume the following liabilities or obligations of Seller(s):

_______________________________________________________.

4. Due Diligence

Buyer(s) will be entitled to inspect and analyze the Seller's assets and inventory and the Seller's business and operations, including its books and records, customer orders, liabilities and prospects until the closing, or termination, of this Letter of Intent. Seller(s) will provide all information requested by Buyer(s) and Buyer(s) agrees to execute a Confidentiality Agreement and to not contact Seller's customers or suppliers unless authorized by Seller(s).

5. Contingencies

Before a final agreement can be made, Buyer(s) must be satisfied with the due diligence review and information and documents provided by Seller(s), as well as an authorization from the landlord to assume the lease, negotiation of employment contracts, environmental review (if applicable) and an agreement on the terms of the Definitive Agreement.

6. Definitive Agreement

The Definitive Agreement will be structured as a OPTION 1: transfer of membership interests, or OPTION 2: purchase of business assets (tangible and intangible, including goodwill),  and will include customary covenants, conditions and warranties.

7. Non-Binding Agreement

Except for the paragraphs entitled "Exclusivity" and "Public Announcements and Confidentiality Agreement", the provisions in this Letter of Intent are for informational purposes only and are nonbinding on all Parties. The Prospective Transaction requires further negotiation and documentation, including preparing and executing a final agreement. This letter does not require either party to proceed to the completion of a binding final agreement. The parties shall not be contractually bound to the sale, purchase or transfer listed above unless and until they enter into a formal, written final agreement, which must be in form and content satisfactory to each party and to each party's legal counsel, in their sole discretion.

8. Exclusivity

The Parties agree to Exclusivity for a period of ______ days from the date the last signature is affixed hereto. Consideration for an exclusivity agreement is the time and expense involved in drafting this Letter of Intent and conducting the due diligence review.

9. Public Announcements and Confidentiality Agreement

All parties hereby agree not to release any information to the public with regards to this letter or any potential agreement without the separate written consent of all parties involved. All parties agree that the terms of this letter of intent and any negotiations shall remain confidential between the parties and their legal representation.

10. Authority to Enter Letter of Intent

The parties signing this letter affirm they are an authorized representative of their respective companies and have authority to enter into this Letter of Intent.

11. Closing, Termination of Letter

Closing shall occur no later than [INSERT NUMBER] days from the date the last signature is affixed hereto unless mutually extended by the Parties. The Letter of Intent terminates if Closing does not occur or has not been extended or if either Party provides written notice of termination. If the Letter terminates, the paragraphs entitled "Exclusivity" and "Public Announcements and Confidentiality Agreement" survive termination and continue to bind the Parties, as does any separately executed Confidentiality Agreement.

12. Expenses Associated with this Letter of Intent and Due Diligence

The Parties agree to bear their own expenses, including attorney's and professional fees associated with any due diligence or any other matter associated with this Prospective Transaction.

13. Governing Law

This letter shall be governed by the laws of the State of ______________.

Sincerely,

Agreed to by Seller(s)

______________________________ Date: _______________

[NAME OF PERSON SIGNING]

And Accepted and Agreed to by Buyer(s)

___________________________________ Date: _______________

[NAME OF PERSON SIGNING]


Comments to Help You Complete the Paragraphs in the Letter of Intent

Prospective Transaction: It’s important list out the basics of how the deal will be structured. For an LLC, the sale will be for the membership interests (as opposed to the sale of stock in a corporation), or for business assets. Will it be an all cash transaction? Will the Buyer use some other form of payment (property, stock, etc.). It’s not important at this phase list our every individual detail, just the broad strokes of the agreement.

Related: Selling a Business With Seller Financing

Purchase Price: List the exact purchase price for the LLC membership interests (or business assets). This does not mean that the purchase price can’t change by agreement of the parties, but it’s important for all parties to understand at this point in the negotiation the current proposed purchase price for the business.

Related: How to Price a Business for Sale

Liabilities of the Seller (and Buyer): This paragraph is important to consider because any liabilities not specifically attributed to the buyer will remain in the Seller. Take special precaution to list any liabilities the Buyer will specifically assume.

Related: How to Sell a Business with Debt

Due Diligence: It is common practice to give the Buyer access to confidential business documents that will allow them to assess on their own the enterprise’s viability and the validity of the purchase price.

Related: What is Due Diligence

Contingencies: This paragraph ensures that the Buyer will not be required to consummate the purchase until it is satisfied with the documents and information obtained during the due diligence process.

Definitive Agreement: Since this is the sale of a limited liability company, this paragraph details that the final agreement will be structured as the sale of membership interests (or sale of assets), as opposed the sale of stock in the Seller’s company, or some other form of transaction.

Non-Binding Agreement: This paragraph ensures that each party will not be required to consummate the sale until a definitive Purchase and Sale Agreement is signed. It protects both parties in the case they are not satisfied with the preliminary negotiating and want to exit the sale process.

Exclusivity: The exclusivity paragraph is one of the only two binding paragraphs in the letter of intent. For the Seller, it is important to understand that they are committing to a period during which they will not solicit additional offers to purchase the business. For the Buyer, it provides a period of protection where they can conduct due diligence (which usually involves substantial cost) without the worry the Sellers will choose to sell the business to another party.

Public Announcements and Confidentiality Agreement: This protects both parties’ privacy and requires that all details of the Letter of Intent, including a subsequent definitive agreement, remain confidential.

Authority to Enter Letter of Intent: This paragraph ensures that the parties signing the document are authorized to do so.

Closing, Termination of Letter: This paragraph allows you to specify how much time may pass before the sale of the business must close. After that date, the Exclusivity and Confidentiality provision survive, but the parties are no longer bound by the Letter of Intent.

Expenses Associated with this Letter of Intent and Due Diligence: This paragraph states that each party will bear their own expenses related to the Letter of Intent and the Due Diligence process.

This template was created and commented by Douglas Bean, J.D.



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