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.

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.    Top^

3 Purchase Price

a. Total purchase price
b. Payment terms

i. Down payment
ii. Promissory note terms (interest rate, default, etc.)
iii. Performance payments
iv. Royalties/fees
v. Purchase price adjustment assumptions and adjustment events
vi. Liabilities to be assumed

c. Allocation of purchase price    Top^

4 Security/Collateral
Identify the security/collateral provided as security for any deferred payments.

a. Assets acquired
b. Personal guarantees
c. Other assets of buyer
d. Stock pledge
e. Duration of guarantee
f. Guarantee amount and priority of foreclosure    Top^

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.    Top^

6 Consulting/Key Man Agreement Terms

a. Term (ability to terminate)
b. Time commitment while employed
c. Compensation
d. Severance terms
e. Benefits
f. Confidentiality
g. Right to inventions/developments    Top^

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.

a. Term
b. Geographical area
c. Description of prohibited activity
d. Consideration

i. Lump sum
ii. Deferred payment (note)
iii. Determined by a formula following purchase or termination of employment    Top^

8 Real Property Facilities

a. Assumption of lease

i. Landlord consent
ii. Renegotiate lease as a condition of purchase

b. Terms to acquire real property facilities
c. Hazardous waste inspections and indemnities
d. Compliance with zoning and other governmental regulations    Top^

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.    Top^

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.   Top^

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).    Top^

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.    Top^

13 Broker Obligation
Identify who is responsible for any brokerage fees in the transaction.    Top^

14 Sales Tax
Identify who is responsible for payment of any sales tax.    Top^

15 Expenses
Specify whether or not each party will be responsible for their own expenses in connection with the transaction.    Top^

16 Communications, Press Releases and Disclosures 
Generally, the parties will prefer some mutually agreed upon public disclosure regarding the transaction.    Top^

17 Timing
Set forth a time line for the completion of documents, due diligence and other conditions precedent to closing.    Top^

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.    Top^

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

i. Identify all the major issues;
ii. Engage in the fact finding required to assess the viability of doing the transaction;
iii. Undertake the appropriate legal, tax and business planning necessary to structure the transaction; and
iv. 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.    Top^

Roger L. Neu
This brochure was prepared by the Law Offices of Roger L. Neu, Inc. Mr. Neu specializes in privately held company mergers and acquisitions. With over 20 years of experience, Mr. Neu has been involved in successfully completing mergers and acquisitions for over 150 privately held businesses. Mr. Neu was a CPA with Price Waterhouse, later attended Loyola Law School, graduating with honors, and worked with a large Orange County law firm for four years before establishing his law firm in 1982.

Law Offices of Roger L. Neu, Inc.
Specializing in Mergers and Acquisitions, Entity Reorganizations, Business Contracts, Capital Formation and Business Tax Planning

Phone (949) 863-1700 | Fax (949) 863-1701 | 2040 Main Street, 9th Floor | Irvine, CA 92614

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