When you're negotiating a business deal and negotiations are getting serious, use a Letter of Intent (or Term Sheet) to take proceedings to the next stage.
A Letter of Intent (sometimes referred to as a Letter of Interest) is a non-legally binding document, usually issued by the buyer to the seller, which outlines an agreement in principle for the buyer to purchase the seller's business at a proposed price. As the name suggests, it formally sets out in writing the intentions of both parties in the negotiations. It not only makes clear the responsibilities of both parties, but protects their rights too.
Whilst not a legally binding agreement, a Letter of Intent significantly increases the likelihood that a deal will eventually go through, probably with a few modifications, following completion of Due Diligence and final negotiations.
See a sample template below.
Letter Of Intent
(State) (Zip code)
Dear (Name of seller),
Reference: Purchase of the Assets/Stock (delete as appropriate) of (insert name of business or corporation)
This letter establishes the intention of the (insert Buyer name), henceforth known as the "Buyer”, to acquire the assets/stock (delete one as appropriate) of (insert business or corporation name) from (insert name), henceforth known as the "Seller”.
The Buyer and Seller are henceforth to be referred to collectively as the "Parties” to this Agreement (or "Party” where referred to individually).
This Letter of Intent Agreement supersedes any previous Agreements between the Parties.
The provisional Purchase Price agreed for the assets/stock (delete one as appropriate) of the business (as outlined in Schedule A, attached)shall be $250,000.
On signature of this Agreement by the Seller, a deposit of £50,000 shall immediately be payable by the Buyer to a 3rd party escrow account, using an escrow agent agreed by both parties. In the event that this Agreement is not concluded the deposit will be repaid to the Buyer.
If this Agreement is concluded, subject to the conditions detailed below, a further $75,000 cash sum shall become payable by the Buyer to the Seller at the time of deal closure, making a total cash payment from the Buyer of $125,000.
The balance of the Purchase Price, $125,000, shall be payable through a seller-financed Promissory Note. The repayment terms, timetable, security and interest rate charge will be agreed during final negotiations on completion of Buyer Due Diligence.
The closing of the transaction referred to in this Agreement shall be subject to certain terms and conditions, including:
I. the preparation and execution of a definitive Business Sale Agreement setting forth the terms of the final legally binding transaction
II. confirmation that both Parties have the authority to enter negotiations and execute the terms within this and any subsequent Agreement
III. (if applicable) the approval of that Business Sale Agreement by the Board of Directors of (insert corporation name)
IV. the Buyer’s verification and approval of the Seller’s financial statements, with the Buyer having the option of employing 3rd party consultants to perform a confidential audit of the Seller’s financial records and business operations
V. compliance by both Parties with all applicable local, county, state and federal laws and regulations
VI. the Seller agrees that he/she will not negotiate directly or indirectly with any other party concerning the sale of his/her business whilst this Agreement is in force
VII. the Seller agrees not to undertake any activity or transaction that would significantly reduce the value of the Seller’s business or assets
VIII. the Parties agree to apply strict confidentiality, not only to the content of this Letter of Intent, but also regarding its existence. Information may only be shared with nominated representatives of the respective Parties, including legal and financial advisers, or to public and governmental agencies if the Party’s lawyers rule that such disclosure is necessary to comply with applicable law. Both Parties declare that measures will be taken to ensure that these nominated individuals maintain strict confidentiality
IX. the confidentiality clause in viii. above is binding on both Parties for one year from the date of receipt of this Agreement by the Seller
X. the Seller will provide to the Buyer all details required for Due Diligence (as specified in the attached Schedule B of Buyer requested materials)
The following deadlines shall apply to this Agreement. Failure to comply with any of these timings shall lead to the automatic expiry of this Agreement (unless an exception is agreed in writing by both Parties):