Selling a business can be intimidating for small business owners in Atlanta, Georgia. A letter of intent (LOI) is one of the most important documents since it outlines all the major aspects of the sale, including the sale price and other details.
This blog post will provide an overview of LOIs and how they work in a business sale process, what should be included in your LOI, and tips for making it successful.
What Is A Letter of Intent (LOI)?
A letter of intent is an official written document outlining the main points of an agreement between two or more parties before signing a binding contract. It's crucial for businesses that are selling because it serves as evidence that both parties have come to some sort of agreement regarding the sale.
Simply put, an LOI can pave the way for the buyer and seller to show intent or commitment to close a business sale deal.
Even though LOI doesn't have any validation in court, it still morally binds the buyer and seller to keep the deal moving forward.
How Does An LOI Work In A Business Sale Process?
The major application of LOIs in business sales is to serve as one of the key documents in terms of a deal. In most cases, an LOI is modified multiple times during the negotiation phase as per the suggestions of both parties.
Let's look at two examples.
Let's say you are selling a restaurant to another party. In this case, an LOI would state the amount paid for your restaurant and any conditions required by you or them. For example, if they must pass certain inspections before closing. The buyer may also request that you sign a nondisclosure agreement to keep confidential information private throughout negotiations. Finally, your obligations after closing may be outlined, such as providing training services or support during transition times.
Similarly, if you own an IT company and sell it to another party, your letter would outline all these points but tailored specifically towards your industry, such as software licenses being transferred over, server maintenance agreements, etc. Since there are little to no legal obligations involved with signing an LOI, both parties can freely negotiate this document. However, if you want to ensure that the terms agreed in an LOI aren't legally binding, they should be mentioned in the agreement. So when drafting an LOI, it is essential to involve a legal expert to reap the full benefits of this document.
What Should A Letter Of Intent To Sell A Business Include?
An LOI can include a wide range of clauses, and depending upon each sale, both parties can mutually add or remove certain items from the letter. With that said, here are some provisions that are a part of most LOIs used in a business sale deal:
Description Of The Deal: This section outlines all key aspects of the deal, such as purchase price, method (cash/stock/debt), payment structure (upfront/deferred payments), and the timeline for completion.
Contingencies: This section of an LOI describes the prerequisites that must be met for the business sale can move on to the next step. For example, as a seller, you may set a precondition for the buyer to arrange to fund the deal before it can be finalized.
Nondisclosure Agreement: This agreement ensures that the buyer can't disclose any information they learn about your business during the business deal. A nondisclosure agreement may be legally binding, so it is important to understand that using an NDA in your LOI.
Obligations: An LOI may also contain the responsibilities of both parties involved in the business sale.
Tips For Your LOI
When writing an LOI for a business sale, make sure to include the following:
Clearly define each party's responsibilities in the letter
Describe a timeline for the completion of all aspects of the deal
Make sure both parties have read and agreed on the letter's terms
Have a legal expert review the letter to ensure all elements comply with the law.