Structuring the Sale
Offer to Purchase / Letter Of Intent (LOI)
Once committed, the buyer often prepares a Letter of Intent. The LOI is an intermediate document that summarizes the main terms that you and the buyer believe will be incorporated into the Purchase and Sale Agreement. It typically is a non-binding recap of where the parties stand in their informal negotiations and reflects the buyer's serious intent to consummate a transaction. Although a non-binding LOI has no legal force and effect, it may nevertheless be a positive moral force to encourage the parties to adhere to the terms of the deal. The LOI may be prepared with the assistance of a Quantum Business Solutions Network intermediary (in the event the buyer is unrepresented and with your consent) in order to submit a formal offer to the seller to purchase the business along with an earnest money deposit. Thereafter, we present the offer to you, answer any questions regarding the offer and assist in formulating a response.
The LOI typically includes the following substantive and procedural items (although each one is customized to meet the specifics of each transaction).
1. Substantive Items:
- The Sales Price and how it is to be determined
- Whether the purchase will be an "asset sale" or an "entity acquisition"
- How payment will be made (i.e., lump-sum at closing or installment payments and in the case of the latter, the proposed interest rate and term)
- The level of protection to the seller in an installment sale (i.e., retaining a security interest in business assets, obtaining personal guarantees from the buyer and/or third-parties and/or obtaining a lien on the buyer's other assets)
- A list of assets that are to be included in the purchase and those that will be excluded
- Whether and to what extent any business liabilities will be assumed as part of the purchase
- The treatment of inventory, if any, in the purchase
- Whether the buyer will assume or be assigned the existing lease for the business premises and/or equipment
- Whether and to what extent the seller is expected to agree not to compete following the sale
- Any arrangements for training and support as part of the sale and whether the seller will continue working as an employee or consultant in the future
2. Procedural Items:
- Whether the seller is expected to negotiate exclusively with the prospective buyer providing the LOI or whether the seller reserves the right to engage in discussions with other possible purchasers
- A schedule for completing negotiations, entering into a Purchase and Sale Agreement, conducting due diligence and closing escrow
- A listing of "open" terms and conditions that remain subject to negotiation
- An outline of the due diligence to be conducted by the buyer and any further investigation of the buyer (i.e., examining prior business experience and financial ability to consummate purchase and service debt)
- Whether the LOI is binding
