What You Need to Know About a Letter of Intent to Sell Your Business

If you are considering selling your business, you may know that there are many steps involved.

There are several things to do long before the parties execute a comprehensive contract. There are negotiations and preliminary documents.

A letter of intent to sell your business is one of these preliminary documents. Though it may not be binding, the letter of intent is still a critical part of the business sale process.

The letter of intent is the key document when it comes to negotiating a business sale transaction. It’s the working draft of the final purchase agreement.

Business Transaction Attorney Trevor Brewer

In this article, we’ll discuss letters of intent, also called LOIs, from the seller’s perspective. We’ll also include several tips that will help in the sale of your business.

What is a Letter of Intent?

A letter of intent is a preliminary document in the sale of a business. It usually comes after a buyer and seller have already had significant discussions. In the sale process, the LOI comes after the parties have already decided on the basic terms but before the final contract.

In an LOI, the buyer and seller can outline their expectations before crafting and executing a binding written agreement. Usually, LOIs are non-binding. However, there may be terms contained within the LOI that should be binding, discussed further below.

After the parties sign an LOI, the buyer will then complete their due diligence. If everything goes according to plan, the terms of the LOI generally turn into the terms of the final contract.

Sometimes, an LOI may come with a deposit from the buyer. This may happen at the seller’s request if they wish to gauge the seriousness of the buyer’s interest. Generally, however, at the LOI stage, it is clear to the parties that they both wish to finalize the sale.

Important Tips for Your Letter of Intent

You may be at the stage where it’s time to consider a letter of intent to sell your business. If so, there are several tips you should consider.

1. Hire a Lawyer.

Much of the time, since a letter of intent for the sale of a business is non-binding, the buyer and the seller won’t bother with attorneys. However, it is a much better strategy to hire a lawyer at this stage. It generally won’t cost a lot to have an experienced business attorney draft your intent to sell letter.

Additionally, hiring an attorney at this stage signifies to the buyer that you are a sophisticated seller. If you don’t have prior experience selling a business, an attorney can be an invaluable asset for you at this time.

2. Think It Through.

Even though the letter of intent is generally non-binding, this is not the time to quickly throw together some terms without giving it a lot of thought. Between sophisticated buyers and sellers, changing the terms of the letter of intent before the final written contract is not viewed favorably.

In other words, although the document may not technically be legally binding, it is an extremely significant document between the parties of the sale.

This is another reason to seriously consider getting an attorney to help you with your letter of intent. An attorney can help you make sure you’re not leaving important terms out of the LOI.

3. Keep Your Negotiating Power in Mind.

For a seller, the period just before the letter of intent is signed is the best time for negotiating. After the basic terms of the deal go into the letter of intent to sell your business, you won’t have as much leeway to negotiate.

Therefore, if there are terms that are extremely important to you, now is the time to discuss them with the buyer and have them put into the LOI. Additionally, don’t sign the document too quickly and give the impression of being overeager for the deal.

4. Include Some Provisions That Are Binding.

Although the specific terms of the sale may not be binding, you should include some provisions in the letter of intent that are binding. For example, the buyer may wish to have a no-shop clause, so that they don’t have to worry about competing offers during their due diligence.

As a seller, you will likely want to have a confidentiality provision to protect yourself if the sale doesn’t go through. You also may want a clause that details the parties’ exclusivity in the negotiating process.

5. Make Clear Which Provisions Are Binding and Which Are Not.

To avoid having a court decide that your entire letter of intent is binding, make clear which portions are and aren’t. This should be drafted within the text of the letter of intent itself.

6. Consider Including Basic Legal Terms as Well as Business Sale Terms.

You’ll want to include some of the same boilerplate terms you would include in a contract. For example, your buyer may wish to include terms about your non-competition after the sale. For the letter of intent itself, you will likely want to include a governing law provision, as well as a dispute resolution provision, in case the deal does not go through.

Get Started with Your Letter of Intent

Selling your business is a significant proposition. It’s one that often warrants the assistance of a lawyer. If you are considering the sale of a business, or are at the stage where you need a letter of intent drafted, contact BrewerLong. We have years of experience helping business owners through all stages of selling a business.

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Trevor Brewer

Primarily working with business owners and their families, Trevor advises clients on business structuring and sale transactions, regulatory compliance, third-party contracts, liability protection and general matters facing small business owners. His focus extends beyond legal advice and includes business strategy and wealth preservation. Trevor also works with families regarding their estate planning needs, including probate, trust administration, and wills.

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