Importance of the Letter of Intent to Sell Your Business - VR Business Sales Blog

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Monday, January 25, 2010

Importance of the Letter of Intent to Sell Your Business

JoAnn Lombardi
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Having to draft a written understanding of what both the seller and buyer think they have preliminarily agreed to is important as the point of reference for due diligence and the preparation of definitive agreements in the sale of a business.
Now most buyers are not interested in letters of intent because they may trigger a requirement for public news releases. Sellers especially don’t want to announce a transaction that could be derailed.  
However, it is important to use a letter of intent whether you're the buyer or seller because both parties need to be able to reduce to writing the basis on which due diligence belongs to the buyer and seller. In most cases, the seller must decide whether to authorize the buyer to conduct due diligence. From there, the buyer has to ask the target to discontinue discussions with other interested parties.  
Experience shows that an owner of a middle-market business is in a better position if he or she requires a letter of intent from the buyer. It doesn't matter that a letter of intent is usually a non-binding agreement with occasional vague language about the terms of the proposed transaction. These kinds of documents are not insured lightly, which forces both parties to clarify their intentions.  
Focusing on the Terms and Provisions  
Sellers should focus first on the business terms of the sale and then focus on the representation, warranties and indemnification expectations of the buyer. Owners of middle-market businesses often are unpleasantly surprised by provisions that even their own counsel might consider reasonable. Usually, there are limited provisions of this type because the seller wants no continuing potential liability; or they are relatively loose where the seller is looking to achieve a high price even if offsets occur later because of the indemnification obligations that are associated with the agreement.  

Understanding the Details
It is important that the seller takes the time to comprehensively understand the details of all materials documents that are associated with the business sale. Remember that subtle changes can result in costly consequences; therefore, you as the seller must issue clear guidelines to your counsel on the level of discretion in lawyer-to-lawyer discussions. The key is in the details.  
Managing the Time Correctly
In order to establish and sustain momentum in the transaction right till completion, you must have an aggressive timetable for completing due diligence and deal documentation. Unanticipated changes can cause disaster that will torpedo the deal on the downside, while happy surprises can help improve the situation for a good close.


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