What should be in my Letter of Intent to buy a business?
One of the first stages in buying a business is to compose a letter of intent. This should be a non-binding offer that generally outlines the terms of your purchase intent. It can describe various aspects of your proposed purchase such as the price, financing terms, and transition arrangements. The key to the letter of intent is to begin negotiations on the acquisition.
I. Indemnify- The key aspect of every letter of intent is you need to specify that the agreement is not an offer to purchase nor a contract. It is imperative to qualify this aspect of the letter of intent because if you do not the seller maybe confused into thinking it’s something more than a way to start negotiations. State that the document is a good faith gesture to begin negotiations.
II. Identify the parties – Identify the appropriate parties, you or your business as the buyer and the appropriate vesting or title for the seller.
III State the proposed terms with price- Include the price, the terms including interest paid to the seller. There are several terms you should and can consider when putting in a letter of intent. Remember that there are several details that you cannot address with your first communications with the seller.
IV. Consideration – The “earnest money” or consideration in the purchase shows the seller you are serious about purchasing the business. Some brokers will tell you $1000 is customary others will say that 1% of the purchase price is more appropriate. Remember there is no hard and fast rule to how much money you should put down. In theory the more money you put down the more serious you are. These funds SHOULD NOT be sent to the seller. They need to be placed in a 3rd party escrow company. Usually the listing broker will have access to one that is regulated by your local jurisdiction. You should also include that you may retract these funds at any time.
V. Restrict the time for response – The time for response can be as little as one day or you can give the seller up to one week. I strongly suggest not going over one week on the time for response. The seller needs to know you are serious and time is important.
VI. Affirmation – If the seller agrees with your price and terms give them a place where they can respond affirmatively and instructions on how they can contact you. ALWAYS leave a phone number. The reason for this is you can open a clear line of communications directly between yourself and the seller. Most sellers will want to talk with you or meet with you directly.
VII. As a final note remember that a Letter of Intent should not legally bind you to the purchase of the business. Always seek legal counsel to make sure you haven’t crossed the line between a letter of intent into a bona fide offer to purchase the business.