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LEGAL
- December 2004 by Clifton B. Clark, ESQ., CPA and Joseph H. Terry, ESQ. Buying or Selling a Business?
The first question to answer is whether – or to what extent – the document will create legally binding obligations. While you may want to enter into a “binding” letter of intent in some situations, most letters of intent are designated as non-binding. You will also have to address the specific content of the document itself. The most important items to address include the form of the transaction itself, the purchase price, and the payment method or terms. Each of the various forms of business acquisition has its own tax and non-tax advantages and disadvantages. It’s best for the parties to seek professional advice from their legal and financial advisors before committing to any form of business acquisition. From the seller’s perspective, terminating negotiations after the execution of a letter of intent can be a particularly painful decision, especially if employees, vendors and customers have already learned that the business was for sale and that a deal was in the works. For this reason alone, it is often best for the seller to include as much detail in the document as possible. The parties may also want the letter of intent to address:
Most letters of intent will include language providing the buyer with access to the books and records and, in many cases, the employees and customers of the seller. Although such access may be necessary for the buyer to complete its due diligence investigation, the seller should include language that prohibits the buyer from disclosing confidential information to third parties or using that confidential information to compete with the seller if the transaction is abandoned prior to closing. In many cases, the buyer will want to address the scope of the seller’s representations, warranties and indemnification obligations by simply providing that the definitive agreements will include “customary representations and warranties” and “customary indemnification provisions”. This may seem perfectly acceptable to the seller, until the seller receives the first draft of the buyer’s acquisition agreement and recognizes the burdensome nature and significant legal implications (including, in many cases, personal liability) arising out of what the buyer will argue are “customary” representations and warranties and “customary” indemnification provisions. As an alternative, the seller may want the letter of intent to specifically identify the nature (and period of duration) of the representations and warranties the buyer will require, and the extent of the seller’s indemnification obligations. The process of negotiating a letter of intent often helps focus the parties’ attention on the more important aspects of a proposed transaction. Unfortunately, the fact that most of the documents are designated as “non-binding” sometimes detracts from the importance of the process. Remember to carefully consider the legal and practical effects the document will have on your own goals and objectives. Clifton B. Clark Esq., CPA and Joseph H. Terry Esq. are partners in the law firm of Dinsmore & Shohl LLP and practice in the corporate department of the firm's Lexington office. |
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Copyright 1996-2004, by Kentucky Business Online. All rights reserved. Editorial content
is copyright 2004, Lane Communications Group The Lane Report is a trademark of Lane Communications Group. All other trademarks are the property of their respective owners. |
The execution of a letter of intent often represents the most critical stage in the process of negotiating a business acquisition. Whether you are a prospective buyer or seller, the importance of negotiating a good letter of intent cannot be overemphasized. Even a “non-binding” letter can have significant legal and practical ramifications.