7 elements to write a letter of intent

What must my Letter of Intent contain to buy a business?

One of the first stages in buying a business is writing a letter of intent. This must be a non-binding offer that generally outlines the terms of your intent to purchase. You can describe various aspects of your proposed purchase, such as price, financing terms, and transition arrangements. The key to the letter of intent is to start negotiations on the acquisition.

I. Indemnify: The key aspect of each letter of intent is that it must specify that the agreement is not an offer to purchase or a contract. It is imperative to qualify this aspect of the letter of intent because if it is not done, the seller may be confused into thinking that it is something more than a way to start negotiations. Express that the document is a gesture of good faith to start negotiations.

II. Identify the Parties: Identify the appropriate parties, you or your business as the buyer and the proper right or title as the seller.

III Indicate the proposed terms with price- Include the price, the terms including the interest paid to the seller. There are several terms you should and can consider when submitting a letter of intent. Remember that there are several details that you cannot address with your first communications with the seller.

IV. Consideration: “money-back” or consideration in the purchase shows the seller that you are serious about buying the business. Some brokers will tell you that $1000 is the norm, others will say that 1% of the purchase price is more appropriate. Remember that there is no hard and fast rule about how much money you should deposit. In theory, the more money you put in, the more serious you are. These funds MUST NOT be sent to the seller. They must be placed with a third party escrow company. Typically, the listing broker will have access to one that is regulated by their local jurisdiction. You should also include that you can withdraw these funds at any time.

V. Restrict response time – Response time can be as little as one day or you can give the seller up to a week. I strongly suggest not spending more than a week on response time. The salesperson needs to know that you mean business and that timing is important.

SAW. Affirmation: If the seller agrees to the price and terms, provide them with a place where they can respond in the affirmative and instructions on how they can contact you. ALWAYS leave a phone number. The reason for this is that it can open a clear line of communication directly between you and the seller. Most sellers will want to talk to you or meet with you directly.

VIII. As a final note, remember that a Letter of Intent should not legally bind you to the purchase of the business. Always seek legal advice to ensure that you have not crossed the line between a letter of intent and a bona fide offer to purchase the business.