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A letter of intent is often used in the purchase and sale of a business to set forth the framework for the negotiation of definitive transaction documents; and closing of a transaction. Typically, a letter of intent does not create a binding contractual obligation to purchase or sell the business.
There are four “share purchase” methods including the three merger varieties plus the purchase of the shares of the target company from the target company shareholders. Click here for more detail. In contrast there is only one “asset acquisition” method by which the acquiring company purchases the assets of the target company.
As a potential seller, you must understand that price, while hugely important, is not the only important term you will need to negotiate with a potential buyer. Another hugely important issue is structure. You should understand that all business sales can be structured in one of five ways.
The first significant, substantive document in most business sales or any merger & acquisition transactions is generally the letter of intent. This may also be called a memorandum of understanding, expression of interest, indication of interest, or term sheet, but for purposes of this article, all of these terms will collectively be referred to as a letter of intent.
Building your business took hard work and time. Selling it requires the same. You can go through the research, find the right buyer, craft a strategy, and yet it can all come to a screeching halt when capital gets tied up in escrow. When your retirement is on the line, complications in the sale, questions about representations, and extensions in the timeline are not ideal.
Any buyer needs to understand the roles of each member of the Seller’s management team. The buyer will have a due diligence list, and information requests are part of the process which can lead to a sale. Potential buyers will want timely, accurate information.
There are certain exceptions to the basic rule that a buyer of assets buys free and clear of claims against the seller.
The Purchase Agreement will contain a section that might be titled “General” or “Miscellaneous” or something similar. It may also include a section containing certain definitions for terms used throughout the Purchase Agreement. These provisions are sometimes called “boilerplate” provisions. However, they can be just as critical to the parties as the sections described above. These provisions typically help answer the following questions:
If the transaction is not a sign and close, then the Purchase Agreement will contain provisions regarding how a party may terminate the contract. Typically, the Purchase Agreement will provide that it may be terminated as follows: the mutual written consent of the parties; by either party if there is a court order permanently restraining, or otherwise prohibiting the transaction; by either party if the closing has not occurred by an agreed outside date, unless the failure to close by such date is because of any failure to fulfill any obligation under the agreement by the party seeking to terminate; by either party if the other party in material breach of the agreement, and such breach is not cured after notice and a reasonable cure period;by the Purchaser at any time; except that the Seller might require a termination payment from the Purchaser in exchange for agreeing to this right.