What is a Letter of Intent for a Business Purchase or Sale?

 Posted on October 21, 2022 in Business Law

Naperville and Yorkville Letter of Intent Attorneys

A letter of intent is an initial letter expressing interest in purchasing a business or franchise. The letter of intent summarizes the buyer’s intention to purchase the seller’s business (or franchise). The letter of intent contains key terms and conditions for the proposed business sale.

Benefits of Letter of Intent

The Letter of intent provides a detailed description of the proposed business deal. The letter of intent provides a specific description of the timeframe proposed for completing the proposed deal. The letter of intent should summarize the following information:

• Prices and Terms such as the business to be acquired

• Outline of the payment and financing terms (if applicable) including the down payment of earnest money

• Conduct in the ordinary course such as the seller continuing the status quo of their business

• Type of deal such as whether the deal will be a stock purchase agreement or an asset purchase agreement

• How expenses such as attorney’s fees will be managed

• Public Announcements of the proposed transaction (after completion of the purchase or sale)

• Broker’s Fees (and whether Brokers are involved)

• Exclusive Negotiating Rights (or whether there may be a right of first refusal)

• Purchase or Leasing of Commercial Real Estate

• Miscellaneous terms

The letter of intent is a non-binding agreement. The letter of intent identifies key conditions, such as due diligence rights, which may allow the buyer (or seller) to cancel the deal. The letter of intent often prevents the seller from accepting competing deals during the negotiation process. The letter of intent is the first step in consummating a business purchase or sale. The letter of intent should be tailored to the specific facts and circumstances of the business sale or purchase (or franchise purchase or sale). 

Asset Purchase Agreement vs. Stock Purchase Agreement

Asset Purchase Agreement

The asset purchase agreement is a written agreement between a buyer and seller to purchase a business and/or property. The Asset Purchase Agreement or otherwise known as a “purchase and sale agreement” is a legal agreement, which describes the specific assets that the buyer proposes to purchase (from the seller). 

An asset sale purchases individual assets such as the following:

• Customer list of a business

• Goodwill (associated with the name and reputation of a business)

• Real Estate (right to the location, lease rights, and/or sale of real estate)

• Franchise Rights and Responsibilities

• Systems and Processes

• Digital assets such as website address and social media information

• Inventory

• Equipment and Contracts (assigned if any)

An asset sale or purchase involves negotiations and legal work such as drafting a properly drafted and prepared asset purchase agreement. The asset purchase agreement details the terms and conditions of the proposed asset sale (and purchase of certain liabilities). The buyer may want to have assigned certain leases, which contain commitments to pay a third-party such as leased equipment or credit card processing equipment.

Stock Purchase Agreement

A stock purchase agreement is a legal binding contract between a buyer and seller of a business. The stock purchase agreement is unlike the asset purchase agreement because the shares of the business (or membership interests of the LLC) are purchased versus the assets. The advantage of an asset purchase agreement is the limited protections. Purchasing the assets of a business is preferred (for a buyer) because purchasing the stock or LLC interests of a business is risky. A stock purchase contract or agreement is risky because a business or franchise may have unknown liabilities. These unknown liabilities can have a significant impact on a buyer’s interest.

A buyer may desire a stock purchase agreement because a seller’s license is valuable such as a liquor license or Medicare license (or similar licenses). Home healthcare companies are regularly conducted as stock purchase agreements rather than asset purchase agreements.

Naperville and Kendall County Letter of Intent and Business & Sale Attorneys

In summary, the letter of intent is the first step in completing the business purchase or sale. Hiring experienced business attorneys are critical to protect your legal rights. At Gateville Law Firm, our attorneys and skilled and experienced in business negotiations and drafting letters of intent. Utilize our business instincts and knowledge of the business and purchase and sale process to assist you with your business purchase or sale needs. Contact us today via online form or let us know how we can assist you.

Benefits of Using a Letter of Intent to Purchase

A letter of intent to purchase allows the parties to focus on the essential terms of the agreement without prematurely negotiating the specific legal terms. Some of the advantages of using a letter of intent to purchase include:

• Provides a clear indication of the timeframe for concluding the negotiations and completing the broader transaction.

• Communicates and documents your preferences.

Call us at 630-780-1034.

Sources

https://www.contractscounsel.com/t/us/letter-of-intent-to-purchase

https://ironcladapp.com/contracts/asset-purchase-agreement/