Business Acquisitions Letter of Intent

Business Acquisitions Letter of Intent - M&A Law Firm

The heart and soul of a business transaction should be embodied in the letter of intent. A poorly drafted letter of intent may render the transaction dead on arrival. On the other hand, a well drafted letter of intent provides a solid foundation upon which to build relationships and to consummate successful transactions.

This document sets forth some basic information regarding letters of intent. In no event should the information contained in this letter be relied upon as giving legal advice and it should be used only in conjunction with the advice of a competent corporate/tax attorney.

Letter Of Intent Template

      1. Parties
        Clearly set forth the identity and a brief description of each party. Does the other party consist of one or more corporations or partnerships? Are the corporations “S” corporations or “C” corporations, parent/subsidiary corporations or brother/sister corporations with separate shareholders? Who are the shareholders or partners and what ownership and management interest do they each hold?
      2. Structure
        Describe the business and tax structure of the transaction specifying what will be acquired or sold (e.g., assets or stock). The financial condition of the other party will dictate payment terms, security/collateral and other key issues. Careful tax planning should be undertaken to determine how to structure the acquisition. Acquisitions may take many different forms including asset or stock sales, combinations of stock redemptions and purchases or tax-free acquisitions (including mergers and consolidations). Noncompetition and consulting / employment agreements will also usually play a major role. There are many ways that acquisitions can be structured and they all involve their own unique tax, securities, corporate and other legal issues. Knowing the alternatives and the implications of each can make the difference between making a good deal or no deal.
      3. Purchase Price
        1. Total purchase price
        2. Payment terms
          1. Down payment
          2. Promissory note terms (interest rate, default, etc.)
          3. Performance payments
          4. Royalties/fees
          5. Purchase price adjustment assumptions and adjustment events
          6. Liabilities to be assumed
        3. Allocation of purchase price
      4. Security/Collateral
        Identify the security/collateral provided as security for any deferred payments.

        1. Assets acquired
        2. Personal guarantees
        3. Other assets of buyer
        4. Stock pledge
        5. Duration of guarantee
        6. Guarantee amount and priority of foreclosure
      5. Offset Rights and Guarantee of Accounts Receivable
        Address the ability to reduce the purchase price in the event that accounts receivable are not collected and whether the purchase price should be adjusted in the event that representations and warranties regarding value are not correct. Identify the amount of any “basket” or “deductible” which operates as a cushion/offset for the seller against claims by the buyer.
      6. Consulting/Key Man Agreement Terms
        1. Term (ability to terminate)
        2. Time commitment while employed
        3. Compensation
        4. Severance terms
        5. Benefits
        6. Confidentiality
        7. Right to inventions/developments
      7. Non-competition

        Non-competition restrictions will usually have to be tied to either the current transfer of equity / goodwill or to a future transfer of equity/goodwill.

        1. Term
        2. Geographical area
        3. Description of prohibited activity
        4. Consideration
          1. Lump sum
          2. Deferred payment (note)
          3. Determined by a formula following purchase or termination of employment
      8. Real Property Facilities
        1. Assumption of lease
        2. Landlord consent
          1. Renegotiate lease as a condition of purchase
          2. Terms to acquire real property facilities
        3. Hazardous waste inspections and indemnities
        4. Compliance with zoning and other governmental regulations
      9. Due Diligence

        The parties must agree on the amount of due diligence that can be completed before signing final agreements. Disclosure of sensitive but important data such as customer and supplier lists are usually only disclosed after the execution of final agreements. Confidential arrangements may be made, however, for disclosure of such data prior to execution of final agreements. Both buyers and sellers must be cautious in dealing with confidential proprietary information.
      10. Representations and Warranties

        Set forth the general nature of the type and extent of the representations and warranties to be made by the parties.
      11. Confidentiality

        Describe the parties’ agreement to date with respect to the confidentiality of the letter of intent and the information that might have been exchanged (generally there should be a confidentiality agreement already in place).
      12. Non-negotiation Agreement

        Address whether or not the seller can continue to negotiate with other buyers and enter into a final agreement with another buyer prior to the expiration of a specified period of time.
      13. Broker Obligation

        Identify who is responsible for any brokerage fees in the transaction.
      14. Sales Tax

        Identify who is responsible for payment of any sales tax.
      15. Expenses

        Specify whether or not each party will be responsible for their own expenses in connection with the transaction.
      16. Communications, Press Releases and Disclosures
        Generally, the parties will prefer some mutually agreed upon public disclosure regarding the transaction.
      17. Timing
        Set forth a time line for the completion of documents, due diligence and other conditions precedent to closing.
      18. Non-binding Agreement
        There may be some terms in the letter of intent regarding such issues as confidentiality and non-negotiation that may be binding, but generally a letter of intent should be expressly non-binding because letters of intent do not contain all the final terms and conditions of the transaction. The letter of intent should contain language conforming to California law that makes it very clear that it is non-binding.

The letter of intent process is a critical stage of the transaction.
It should be a time when the parties can:

  1. Identify all the major issues;
  2. Engage in the fact finding required to assess the viability of doing the transaction;
  3. Undertake the appropriate legal, tax and business planning necessary to structure the transaction; and
  4. Foster a relationship of trust and confidence between the parties that will allow them to work together in a positive manner to complete the transaction, and to have a successful transition of the business from seller to buyer.