by Rebecca Berlin
When you've located a serious buyer for your business, the first step to continuing negotiations is the letter of intent. This article outlines some of the things that should be covered in a letter of intent, what a letter of intent is, and what it can be used for.
A letter of intent is exactly what it says it is: It is a letter in which the buyer states his or her intentions to pursue negotiations to purchase your business. A letter of intent outlines the general terms of the deal; the specifics are subject to further negotiation. It doesn't mean that the sale will definitely go through with this particular buyer. It does mean that both the buyer and seller intend to move forward with good faith negotiations toward the ultimate purchase of the business.
The letter of intent serves as an indication to third parties that you and the buyer are in serious negotiations. If the buyer will be borrowing money in order to purchase your business, this letter lets potential lenders know that this deal has a good chance of completion. Any lender will have its own requirements for making sure that a business is worth the amount they are putting up for a loan. But a lender doesn't want to check out every business that the seller might buy. They want to make sure that there is a real possibility of the deal going through first. The letter of intent lets them do that.
As a seller, once you have a letter of intent, it is time to start getting down to the serious details of your business with the buyer. This may mean that you will be disclosing confidential information to the buyer. Because of this, you will want the letter of intent to have a confidentiality and non-disclosure clause. This means that the buyer will promise to keep the confidential information that he or she learns as you go forward with negotiations secret and not disclose it to any unnecessary third parties. You may want it to address specifically who may have access to the confidential information. For example, the buyer may need to disclose confidential information to his or her broker or attorney.
The letter of intent may contain an acceptance paragraph where you, as the seller, indicate your intention to pursue good faith negotiations with this particular buyer. You may also state that you will not continue to consider or negotiate with other buyers while you are negotiating with the current buyer. You will also give your permission for the potential buyer to contact certain people, such as your banker or your accountant, about your business.
Finally, a letter of intent should specify a time frame for the completion of the deal. This will keep negotiations moving. If the buyer is dragging his or her feet, you can remind them of the deadline. If negotiations are progressing, but you won't meet the deadline, you can always agree to extend it.
Even if you don't have a lawyer involved in negotiations for selling your business, you should have hired a lawyer who will assist with complete the sale.You can always consult a local lawyer for free to see if they may be of help. A lawyer can go over the letter of intent with you, if necessary.