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What Is A Letter of Intent and Why Does It Matter?

Posted by Gwen Sylvester in
letter of intent

Are you contemplating selling your business, but you are not sure how the process unfolds? Have you heard various terms related to selling your business and want to figure out how these fit into the bigger picture? One of these common terms that emerges for plenty of entrepreneurs and e-commerce business owners is the letter of intent.

Why Use a Letter of Intent in a Sale?

The letter of intent comes at the phase in the negotiation process after you and the buyer of the business have been able to reach agreement on many of the terms for selling. The letter of agreement formalizes the agreement terms you have come to.

It is necessary to sign a letter of intent to agree on the basic deal terms. The letter of intent can serve as the agreement between the seller and the buyer on the basic deal terms so that there is one final opportunity for them to ask questions or raise issues prior to moving to the contract. Moving on towards an official closing is the next step after signing a letter of intent. Consulting with a knowledgeable business broker can help you to ensure that relevant deal terms are clearly outlined in the process of your entire deal structure. A good letter of intent should include many different facets of the intended transaction, including:

  • Post-sale details
  • Timeline
  • Deal structure
  • Contingencies
  • Ernest money
  • Exclusivity

Earnest money refers to how much is required and if and when that is refundable in the event the deal doesn’t close. Exclusivity covers whether or not the seller is able to review other offers during the closing period, which is typically not pursued through a letter of intent. Contingencies allow for the circumstances under which the seller or the buyer is able to terminate the deal. The deal structure in the timeline or other aspects of your letter of intent that should be explored and include as many details as possible. The timeline explains how long a buyer has to conduct diligence and close the deal and the deal structure has all of the critical information about the financing information and the purchase price. A letter of intent is not a binding agreement for the buyer to purchase this business.

Open-ended contingencies clauses are frequently found inside letters of intent that enable buyers to walk away in the event that they discover that something was misrepresented or if something emerges in the final due diligence process showing that it was not accurate to begin with. A letter of intent is a great opportunity in the form of a document to make sure that both parties are on the same page, but it does not bind them to work together towards closing this deal and is no guarantee of a sale either.

You can consult with an experienced business broker about the different facets of structuring a deal to set yourself up for success. The knowledge of a business broker is often indispensable in the process of deciding to sell your business and moving that business through each phase of the process in full. A consultation with an attorney and other outside professionals can also be valuable during this complicated time.