What should my letter of intent include to buy a business?
One of the first stages in buying a business is writing a letter of intent. This should be a non-binding offer that generally describes the terms of your intention to purchase. You can describe various aspects of the proposed purchase, such as price, financing terms, and transition arrangements. The key to the letter of intent is to start the negotiations on the acquisition.
I. Indemnification – The key aspect of every letter of intent is that it must specify that the agreement is not an offer to purchase or a contract. It is imperative to qualify this aspect of the letter of intent because if you do not, the seller can be confused and think that it is more than just a way to start negotiations. Indicate that the document is a gesture of good faith to initiate negotiations.
II. Identify the parties: Identify the appropriate parties, you or your business as the buyer and the appropriate concession or title for the seller.
III List proposed terms with price: include price, terms, including interest paid to seller. There are several terms that you should and can consider when submitting a letter of intent. Remember that there are several details that you cannot address in your first communications with the seller.
IV. Consideration – The “money back” or consideration in the purchase shows the seller that you are serious about buying the business. Some brokers will tell you that $ 1000 is customary, others will say that 1% of the purchase price is more appropriate. Remember that there is no hard and fast rule about how much money you need to deposit. In theory, the more money you deposit, the more serious it is. These funds MUST NOT be sent to the seller. They must be placed with a third-party escrow company. Typically, the listing broker will have access to one that is regulated by their local jurisdiction. It should also include that you can withdraw these funds at any time.
V. Restrict response time: Response time can be as short as one day or it can give the seller up to a week. I strongly suggest no more than a week to go into response time. The salesperson should know that you are serious and that time is important.
SAW. Affirmation: If the seller agrees to your price and terms, give them a place where they can respond in the affirmative and instructions on how to contact you. ALWAYS leave a phone number. The reason for this is that you can open a clear line of communication directly between you and the seller. Most sellers will want to speak with you or meet with you directly.
VII. As a final note, remember that a letter of intent should not legally bind you to the business purchase. Always seek legal advice to make sure you have not crossed the line between a letter of intent and a good faith offer to buy the business.