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What is a letter of intent?

You're interested in buying a business and feel that you can start negotiations with the seller. However, certain preliminary steps often need to be taken to protect the rights of the parties involved in the transaction. The letter of intent is one of those steps.

Purpose

The letter of intent both initiates and facilitates negotiations when purchasing a business. In addition to defining key elements of the transaction to come, it provides guidance to the parties involved and targets their expectations. It confirms your intention to buy and the seller's intention to sell.

The confidentiality agreement that comes with it authorizes you to carry out a first audit/verification and to require access to some of the business's documents to confirm your interest or to withdraw from the acquisition process should you not like the company's profile.

The letter of intent gives you control of the time frame and helps you initiate the negotiation phase in a positive and pro-active way. You're also showing shareholders, investors, creditors and other potential buyers that you're a serious negotiator. In other words, it's a valuable paper that saves you time and money.

Content

Signed by the seller and the buyer and, in some cases, other parties who will be involved in the transaction, the letter of intent usually includes a short list of key elements.

  • Selling price and terms of payment

    You don't have to give a set price. It can be a formula or an estimated price. The terms of payment, however, must be fairly precise.

  • Description of warranties

    If you expect to have a balance of sale, your letter of intent should then include a description of the warranties.

  • Closing conditions

    You must include the essential conditions of the closing transaction, such as regulatory approvals, environmental inspections or third-party consent (lender, lesser, important supplier, etc.).

  • Collateral contracts

    Your letter must include a description of collateral contracts' key elements, particularly contracts regarding employment, non-competition, non-solicitation, supply, licence, guarantee, etc.

  • Blanket clauses

    Certain blanket clauses must be mentioned, such as the choice of law applicable between parties, time frame of the closing transaction, fees and expenses incurred by each of the parties, etc.

  • Various clauses

    An indemnity clause that addresses the compensation a party will receive in case of damages is essential, as is an exclusivity of negotiation clause and a termination clause. The confidentiality clause is necessary to protect the information and documents shared at this stage and at due diligence.

Legal value

The letter of intent can include a clause that specifies that it doesn't bind the parties, but rather it certifies the parties' intention to negotiate and sign a final sales agreement. When a letter of intent contains such a clause, it basically translates the fact that either party can change its content at any time.

However, if the letter doesn't state its legal implication, you should refer to the basic contractual rules. The letter of intent can be a simple invitation to accepting an offer. The difference between these 2 types of agreements resides in their inforceability.

The purchase of a business demands a well-structured, results-oriented approach. Starting a transaction with a letter of intent is one way of ensuring this approach.

If the seller accepts your offer, you can move on to the following step: Due diligence.

Feel free to consult with your Desjardins account manager who, based on your needs, will refer to one of our many experts.

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