“Letter of Intent” – A Cautionary Tale For Would be Business Buyers and Sellers

I write this article today as a word of caution for readers, clients of Morgan & Westfield, and other professionals who may have read the popular article titled " What Is A Definitive Purchase Agreement ”.

Even a document labeled “Letter of Intent” may be enforced by a court of law as a binding, enforceable agreement if the court determines that the parties intended the document in question to be a binding agreement at the time it is signed.

Regardless of what the parties might subjectively believe-- and just about every business person the author has ever consulted with, would subjectively believe that a “Letter of Intent” is nothing more than a preliminary, non-binding agreement that is intended to facilitate preliminary due diligence ̶ a court of law’s determination as to whether a document labeled “Letter of Intent” might in fact be a binding purchase agreement, will not turn upon the parties’ professed subjective intentions. Rather, a court of law will look to the language contained within the document, itself, to determine what the intentions of the parties may have been, at the time they signed the document in question.

Are You Kidding Me?

No. And believe me, when a business owner is threatened with the potential loss of a company as a result of an adverse court ruling, he/she does not view the matter as a joke.

First and foremost, business owners thinking about selling a business, and prospective purchasers interested in purchasing a business, must

Selling your business is a big decision and the process can be overwhelming to those who are unfamiliar with the market. Your first step, after deciding to sell your business, is to hire a business broker to assist you throughout the selling process. Do a simple google search and you will discover that there are many brokers out there and they offer various types of agreements, such as the exclusive listing or the open listing, to help you sell your business. How do you know which broker to choose and what type of agreement to enter into with that broker? In this article, we will help you understand the basics of the listing contract in all of its various forms.

The Listing Contract

Essentially, when you work with a business broker, you are entering into a listing contract. A listing contract is legal agreement between you and the broker whereby the broker agrees to sell your business on specific terms, and you agree to adhere to those terms. The broker will be doing most of the work when it comes to selling your business, including advertising your business for sale. There are various ways this can be accomplished, and before entering into the listing agreement with a broker you should understand the strategy your broker has for selling your business. Most likely, your broker will use websites and other sources specific to selling a business to find a potential buyer. However, before this process begins, you must choose a broker and enter into a listing contract. Brokers use one of three types of contracts, all of which are outlined in detail below.

Exclusive Listing

A definitive purchase agreement is the final agreement that is signed during the process of buying or selling a business. It outlines the terms and conditions for buying or selling a company, such as the payment structure, the representations, the termination clause, and other important considerations. Unlike a letter of intent, which is a non-binding, preliminary document, “definitive” means the agreement is the final one to be signed before the closing.

A definitive purchase agreement transfers the ownership of a business. A business is nothing more than a collection of individual assets, owned by an entity, such as a corporation or LLC. The purchase agreements to acquire those assets can take two general forms:

  • Stock Purchase Agreement – This transfers the shares of the entity, otherwise known as a corporation or LLC, that owns the assets of the business. By purchasing the shares of stock owned by the entity, the buyer then owns the assets that were previously owned by the entity. Shares in an LLC are technically called “membership interests.” However, for sake of simplicity, most parties refer to the transaction as a “stock sale.”
  • Asset Purchase Agreement – This agreement transfers the individual assets from the seller to the buyer. However, the seller retains ownership of the shares of the entity, and the buyer typically forms a new entity for the assets he or she bought.
  • Typical Clauses

    Typical clauses in a definitive purchase agreement include the following:

    • Definitions – Any well-written purchase