Letter of Intent

Although not necessary, often the buyer will deliver to the seller a letter of intent spelling out in principle the key terms of an eventual purchase with the parties agreeing to negotiate in good faith on many aspects of the purchase. Usually the letter is sent after the due diligence is completed, but sometimes before hand, and then it is of course subject to the due diligence investigation. They are useful to the seller to winnow out uninteresting buyers. The buyer often uses it to arrange financing.

The first consideration is to include certain provisions spelling out that the letter is not binding. Even though it may not be binding, it often creates a psychological or emotional commitment by both parties.

It will establish a purchase price. The buyer should include language making it clear that the price is dependent on many assumptions it has made as well as on the outcome of any remaining due diligence.

The letter usually lists the key assets. It also often makes the key representations, warranties and indemnity promises. It often provides for the buyer paying an earnest money down payment and the terms under which the money will be returned or forfeited. The buyer will want a clause stating that the money will be returned if it cannot go through with the sale because of an inability to obtain financing despite good faith efforts. The letter will provide for the protection of confidential information. It will state what types of closing agreements will be entered into - employment, non-compete, lease. It will provide that the seller will not negotiate with other potential buyers when the letter is in effect. It will provide for the conditions necessary to closing.

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