At the point where you have done preliminary investigation and you are ready to really get serious about discussions with a business owner and detailed examination of the business, you may be asked to sign a letter of intent. This letter is usually non-binding on both the buyer and seller, and it sets out certain conditions for continuing with the purchase negotiations.
The letter of intent often contains
- A time period during which there will be negotiations and the buyer will perform due diligence. In some cases, there is a "drop dead" date after which the letter of intent is no longer valid.
- A confidentiality clause, prohibiting the buyer and seller from discussing the purchase during negotiations (except for specified advisors). It may also limit direct contact between buyer and seller, if a broker is involved.
- A tentative price for the business, but often this has not yet been negotiated.
- Escape clauses or contingencies; for example, buyer is not obligated to buy the business if acceptable financing is not available.
- Intent to include a non-compete agreement in the final negotiations
- Requirement that the owner make no alterations to the business during negotiations; that is, that the business be continued "as usual," to prevent the owner from running down the value of the business.
- A "no shop" clause, preventing the owner from attempting to sell the business to someone else while the two named parties are negotiating.
- Various representations and warranties of both parties. For example, the owner may warrant (promise) that the business has no outstanding liens; the buyer may warrant that he/she has a good credit rating.
