In my last blog post, I summarized the nonbinding provisions contained in a letter of intent. As I’ve previously discussed, a letter of intent is the starting point for entering into a business purchase. In this post, I’ll discuss the binding provisions contained in a letter of intent. The term “binding” means that, even though the prospective seller and the prospective purchaser have not finalized their agreement to go ahead with the sale, certain portions of the letter of intent are required contractual obligations that both parties are required to follow.
Examples of the types of binding provisions contained in a letter of intent include:
- Drafting the Purchase and Sale Agreement. Often the prospective buyer’s attorney, as the party making the offer, is responsible for drafting the proposed purchase and sale agreement, following the outline set forth in the letter of intent. The letter of intent may impose a duty to draft the document, and require the parties to complete their negotiations in good faith.
- Access. The prospective seller is generally required to provide the prospective buyer with access to the business’s records and representatives, so that the prospective purchaser can properly investigate all aspects of the seller’s business.
- Exclusivity. The prospective seller is generally required to negotiate exclusively with the potential buyer, and no other potential purchaser. Otherwise, the potential buyer could spend thousands in legal and accounting fees, only to find out that the business is being sold to someone else!
- Break-Up Fee. Sometimes, if the prospective seller fails to go through with the deal without good cause, the prospective seller may be required to pay a break up fee to the prospective buyer to compensate for the lost time and money spent pursuing the transaction.
- Conduct of Business. The letter of intent often requires the prospective seller to continue conducting its business in ordinary due course, as opposed to slacking off with the attitude of “Soon, this won’t be my problem.”
- Disclosure. The letter of intent may include provisions about what the parties can and cannot disclose about the potential transaction to third parties.
- Confidentiality. A letter of intent often contains restrictions as to how the parties treat confidential information.
- Costs. Will each party bear its own costs related to finalizing the transaction? Or will some costs be shared? The binding provisions of a letter of intent generally set forth how the costs will be handled.
- Consents. Often, in a purchase and sales transaction, various consents will be required. For example, does the landlord need to consent for the commercial lease to be assigned to the purchaser? Does a key third party need to consent for its contract with the seller to be assigned to the purchaser? The parties often pledge in the binding provisions of a letter of intent to both cooperate and proceed in a reasonably prompt manner to obtain the necessary consents.
- Termination. How will the binding provisions of the letter of intent be terminated, so that both parties officially know that the proposed transaction will not go through? The letter of intent often contain language governing termination.
Once the letter of intent is finalized and agreed to by both parties, what happens next in the purchase and sale transaction? Be sure to read my next blog post to find out!
Photo credit: ITU Pictures on Flickr