Purchasing a Business: How to Write a Letter of Intent
A letter of intent (LOI) is a common way of expressing your intention to purchase a property without having to write a formal, legally binding contract. A letter of intent is presented to the seller before the project.
The buyer’s intentions are clearly and simply defined so that the seller knows exactly how and on what terms the buyer wants to buy the property.
A letter of intent is to start a dialogue and create a framework for a dialogue between a buyer and a seller.
“A letter of intent is a written description that expresses the sender’s intention to take or refuse action under certain circumstances, such as entering into a future agreement with the recipient or, more generally, carrying out the intent in the letter. “
Letter of intent in the bidding process
This statement of intent is not traditional. Don’t write and forget. This is a live document that needs to be updated and added regularly during the bidding process.
In the bidding and buying process, the letter of intent informs the property seller that you are not only interested in submitting a purchase offer but that you will also receive all LOI updates and changes in response.
The LOI is a future negotiated agreement. As soon as the investor and seller agree on the LOI, a formal purchase agreement is written.
If the letter of intent is received, the due diligence period begins. It lasts until a time agreed upon by both parties at which a binding contract is concluded at the end of the term.
Conditions may change during this time if certain aspects of the property are discovered that were not previously disclosed.
For example, soil contamination can result in a buyer not wanting to buy a property and wanting to safely withdraw from a non-binding contract.
Or maybe the property is in much worse condition than originally thought, so the buyer negotiates a lower purchase price.
If not binding, is the letter of intent a useless document?
The Letter of Intent is not an offer or a contract. This does not involve you or the seller in the project.
In other words, it’s impossible. Often there is a paragraph at the moment of the LOI, in the end, or in the main section, which indicates and reinforces the non-binding nature of the LOI.
A well-written letter of intent gives the seller an idea of what the buyer has to offer. And because this is a way of putting both parties’ assumptions and views on the important terms of the agreement on paper, it can reduce the potential for misunderstandings that might arise later.
Here are the fine details that need to be included in the LOI.
1. Transaction structure
This is the first part of the letter of intent and is intended as an introduction to the proposed transaction.
This should include a description of the transaction, the names of the parties involved (i.e. the seller and the buyer), whether the buyer is an individual or a corporation, and whether the transaction involves the sale of stock or assets or both.
If these points are not discussed from the outset, the deal can later fail because the conditions desired by the seller may not be possible for the buyer and vice versa.
2. Price and Terms
The letter of intent must also clearly contain the proposed purchase price and an explanation of the assumptions underlying that price.
While many of these assumptions may be wrong during the due diligence process, including them in your LOI provides a roadmap for both parties to adjust the purchase price.
In addition, this part of the LOI should outline the payment terms for the proposed arrangement.
For example, a buyer may want to ask a seller for financing. In the same way, the buyer can seek a deal with all the money or keep the seller interested in the deal.
3. Assets and Liabilities
Another important part of a letter of intent is a list of the assets and liabilities that are part of the transaction.
Here the buyer indicates whether the claim will be included in the contract and whether the seller will keep the money on the balance sheet.
The purchaser will also include inventory in the transaction, as well as equipment leases and other commitments.
This part of the memorandum of understanding shows what company assets and liabilities the buyer knows or is interested in and shows what the buyer is willing to pay for each.
Making it clearer how the buyer is at the purchase price recommended.
A letter of intent is incomplete without a clear indication of the timeframe within which the buyer wishes to complete the transaction.
This helps keep negotiations going throughout the buying process. If necessary, either party may adjust this time frame during the purchase process.
The buyer must also indicate the length of the transition period that will occur after the sale. In addition, if he wants to retain the services of the seller for a certain period after the sale, he must also state clearly.
5. Other terms
All highlights and other terms of the transaction must be included in the letter of intent. If one of the parties has special conditions that determine it, he must notify the other party relatively early.
Examples of these conditions are: whether key personnel should be detained for the transaction, confidentiality agreements and other agreements signed by one or both parties, whether the buyer has obligations to the seller, etc.
There are many ways to write a letter of intent, but the best way is to include all the fine details the seller needs to know.
One of the most common mistakes salespeople make is trying to avoid vague statements of intent to explain the details later.
Don’t make this mistake. Instead, provide all the necessary details as described in this article.