The sale of a business often is a complex transaction. Typically, there are many issues the parties need to consider and agree upon.
Some are significant, while others are fairly minor. Obviously, it is a waste of time, energy and money to concentrate on the little issues before the big issues have been resolved.
A letter of intent helps the involved parties by setting out the essential terms of an evolving deal before substantial time and resources are invested in resolving the finer points.
Items that might be included in a letter of intent include the following:
* A statement of what the buyer proposes to purchase. This statement should be complete enough that it adequately describes what the parties' intentions are. Descriptions of the types of goods are usually sufficient, although if there are certain specific assets that form the basis of the bargain, those might be described in more detail.
* An outline of the essential terms, such as purchase price, terms of payment, and if payment will be made over time, a description of any security interests or payment guarantees that will be provided.
At a minimum, a general description of the collateral that will be subject to a lien should be included.
Plus, if there will be personal guarantees delivered at closing, be sure to specify the names of the individuals who will be expected to provide a personal guaranty and whether those guarantees are to be secured by a mortgage on each guarantor's personal residence.
If the seller expects the personal guarantees will be backed by mortgages and this is not provided for in the letter of intent, the failure to include this condition could lead to difficult negotiations later on, or even worse, end up killing the deal.
* Any post-closing restrictions to be imposed upon the seller and/or its principals, such as a noncompetition covenant, should be described in reasonable detail. Generally, buyers insist upon imposing these types of restrictions to protect the value of what they are purchasing.
* A summary of the principal conditions to closing. The buyer will want several. The seller will want as few as possible.
* A statement as to whether the parties intend the letter of intent to be binding, whether in whole or in part. Generally, since there still are significant negotiations to take place, letters of intent are for the most part nonbinding. Some provisions, however, such as confidentiality provisions, will be binding. To avoid unexpected results, the letter needs to be specific as to which provisions are binding and which are not.
* A statement as to any restrictions on the seller's right to pursue other offers. The seller might be reluctant to do this. If the seller is willing to do this, the seller likely will want some sort of consideration for doing so.
* Any deadline for accepting the provisions of the letter of intent. The parties either need to agree or move on.
If drafted carefully, a letter of intent can help the parties focus their efforts on completing the proposed transaction.
If not drafted carefully-or if either party is less than serious about completing the transaction-a letter of intent can be more trouble than it is worth.
In fact, the single most litigated issue relating to a letter of intent is whether or to what extent its provisions are binding on the parties.
Because of the importance of the letter of intent, both to the parties and the transaction, due care must be taken in its preparation.
Legal counsel and other members of your management team should be involved in the process as early as possible.
Hopefully, this strategy will minimize misunderstandings and other problems that might be encountered later on in the process.
Mr. Jackson is a partner and chairman of the Business Practice Group of the Cleveland law firm Weston Hurd L.L.P.