What is a Letter of Intent?
A letter of intent is a preliminary document generated when selling your business that establishes the key terms of a proposed deal between two parties. The letter sets forth the agreed-upon terms and indicates that both parties are committed to moving forward with the transaction. Sunbelt, however, does NOT take letters of intent. They go straight to an Asset Purchase Contract (APA) with contingencies. Buyer and Sellers appreciate the Purchase contract because it creates a higher closing rate and Sunbelt’s deals rarely fall apart. LOI’s are not legally binding and are used to start negotiations.
That being said, we’ll discuss how letters of intent generally work so you can understand how Sunbelt’s approach works better.
How a Letter of Intent Works
A letter of intent (LOI) describes the information necessary for both parties to make a decision about selling your business. The LOI also outlines the timeline for completing the definitive purchase agreement and spells out any conditions that must be met before the parties can move forward.
Additionally, the LOI may identify the exclusive negotiating period during which the parties agree not to solicit or enter into deals with other parties.
What’s Included in a Letter of Intent?
The structure of a letter of intent depends on the specific type of business deal involved. However, some key components are typically included in an LOI. These include:
Introduction
The introduction of an LOI will contain a statement of the acquirer’s intentions and what they liked about the target acquisition. It also includes the date upon which the document becomes effective, assuming both parties sign off.
Identification of the Parties
The LOI will identify the parties in the agreement. This will typically include the full legal entity of the Seller and Acquirer and address of each one.
Timing and Transaction
The LOI will identify the proposed timeline for signing the LOI, due diligence period and process, drafting and negating the definitive agreement 9APA) and ultimately completing the deal. It may also describe the proposed transaction in general terms. This may include the type of business structure being proposed, such as selling your business with X amount of cash at close and additional remunerations in the form of Earnout and various holdbacks or a Seller’s note.
Contingencies
The LOI will identify any contingencies, or conditions that must be met, before the parties can move forward with the deal which usually include the Due Diligence period and possibly a Quality of Earnings report.
For example, the parties may agree to complete due diligence or secure financing within a certain time frame. The parties may also decide on which state/county laws will govern the agreement.
Due Diligence
The LOI will identify the due diligence period for the buyer to analyze the legal and financial history of the business they are acquiring in the proposed transaction. This period varies in time but Sunbelt typically keeps the DD period to 30 days on the great majority of their transactions.
Other Binding Agreements and Covenants
The LOI may identify other agreements that must be in place before the parties can close the deal. For example, the parties may agree to enter into a non-disclosure agreement or sign a confidentiality agreement.
The LOI may also contain covenants that restrict the actions of each party during the exclusive negotiating period.
Contact Sunbelt Business Brokers
Sunbelt Business Brokers is a full-service business brokerage firm that markets over 200 businesses for sale portals.
We ensure that every listing we present receives custom deal structures, dedicated financial advisors, and compelling marketing assets to get our customers the best price for their business.
To provide the best possible service to our customers, Sunbelt Business Brokers spends a lot of money pre-screening every buyer by establishing a profile and receiving a Personal Financial Statement (PFS).
This allows us to get a head start on selling your business while ensuring that the buyer is qualified. Contact Sunbelt Business Brokers for a free consultation.