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The Letter of Intent or LOI

The Letter of Intent or LOI

What is a letter of intent, and how should it be prepared?  A letter of intent is a document addressed from the prospective buyer of the New Jersey business to the seller setting forth the understanding that was reached during negotiations. It is not legally binding, but it does set forth the foundation for the legal binding agreement to be drafted by the seller’s attorney.

So, what should the LOI include?

First, the LOI should state on the top of every page that it is a letter of intent and is not intended to bind the parties. The first sentence should clearly state that the prospective buyer is offering to purchase the business.

Second, the terms of the deal should be set forth. At the minimum this should include a) price of the business, b) amount of seller financing if any, c) the terms of the seller financing, and d) whether or not bank financing will be sought.

Third, the letter of intent should set forth what is included in the sale; i.e., inventory, accounts receivables, fixed assets such as machinery and equipment, and goodwill.  What is excluded from the sale should also be set forth.

Fourth, the term of any seller employment should be addressed. Is the seller going to work for the buyer for a period of post-closing, what is the length of employment, and what is the compensation?

Fifth, if there is a finance contingency clause, this should be clearly stated; that is, if the buyer is going to seeking to fund from a financial institution, it should be stated that consummating the transaction is dependent upon the buyer successfully receiving funding. The financial institution from which the buyer is going to seek funding should be indicated, and the buyer should be required to provide the seller with the contact information for the loan officer.

There are a number of other items that can be included in the LOI, but these are the basics. The LOI is not a legally binding agreement, and it should be left to the buyer and sellers’ attorneys to incorporate the appropriate legal concepts into the actual contract of purchase and sale, or the asset purchase agreement.

For more information, contact Brad Palmer at 908-931-9300.



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