Letter of Intent: The Framework in the Business Acquisition

Tax Professionals' Resource
November 15, 2013 — 2,123 views  
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Letters of intent are documents that outline the agreements reached upon by two or more negotiating parties before their finalization. Letters of intent may be compared with legal contracts with the difference that they are not as binding as the latter on parties entering the agreement. They are instead, similar to heads of agreement and are typically used for Joint Venture Agreements, Share or Asset Purchase Agreements, and also all generic Agreements that are prepared to close large financial deals.

Though not as binding as contracts, letters of intent may be interpreted as binding by a court of law. This typically happens when they closely resemble legal contracts. There also exist cases where the entire letter of intent may not be binding, except for certain critical provisions; for example, agreements that seek “non disclosure” or those that seek “good faith” negotiations from covenants.

Situations Where Letters of Intent are Most Commonly Used

1.     Complex Transactions: Chief terms, conditions, limitations, and other crucial points of such transactions are briefed for the convenience of the parties involved.

2.    Mergers or Joint Venture Proposals: Such agreements typically proceed slowly. Letters of intent are used for official declaration of the ongoing negotiations.

3.     Credit Card or other Third Party Payments: Any areas of concern, doubts, or certain issues etc. with respect to payments made for somebody else are verified on letters of intent.

4.     Safeguarding Negotiations: Letters of intent serve as safeguards in the event of collapsing of an agreement or a deal in the negotiation process.

Letters of Intent and Their Role in the Acquisition Process -

Consider the situation where your firm has been working with purchasing a company, or a part of it. In such acquisitions, letters of intent serve to establish the framework of the acquisition process. You can formally define your intent about acquiring the company, official with the letter of intent. The same may also be used to communicate your interest in the company and exclude it from entering in to negotiations with other parties.

Attorney drafted letters of intent provide a professional and official overtone to your acquisition intentions. The terms and conditions put by you in this letter, nature of acquisition, price and other crucial details serve as a framework later when the actual acquisition process starts.

Preparing a Letter of Intent for Business Acquisition

Apart from including basic details like your name, name of the firm you represent, the name of the company/business your firm intends to acquire, setting the terms and conditions for the acquisition is crucial. For example, while mentioning the terms, conditions and prices, establish the following details clearly:

1.     Business (or portions of the business) you wish to acquire.

2.     The liabilities that would be assumed in the acquisition.

3.     The cumulative consideration for the business and assets you intend to acquire.

4.     The scope and procedure of diligence review that your firm will do prior to acquisition.

5.     Terms and conditions regarding the conduct of the business to be acquired, in ordinary course till the acquisition.

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