The Letter of Intent to purchase a business (also called an Offer to Purchase, is not necessarily a legally binding document. It simply says that you would like to purchase the business at a specified price and upon specified terms and conditions. If the seller accepts your offer, and the Letter of Intent to purchase a business is not binding, you can then proceed to negotiate a purchase and sale agreement and begin the due diligence process.
It is important that the non-binding Letter of Intent covers all the terms and conditions of the purchase, not just the purchase price. The non-binding Letter of Intent should clearly address all important issues, including:
- The type of purchase: assets or shares
- The price
- How the price will be paid: down payment, bank financing, seller financing, earn-out, etc.
- Which assets and liabilities are included and which are excluded from the purchase
- How the purchase price will be allocated (in an asset sale)
- Expectations of the seller in terms of how long the seller will stay in the business and on what terms
- Details of non-competition requirements
Once the non-binding Letter of Intent to purchase a business is signed by both parties, a formal Purchase and Sale is prepared. The first draft is typically prepared by the buyer's lawyer and then the lawyers for both sides work to make sure the agreement fairly represents the understanding of both parties.