What Is Intent to Purchase Business Agreement?
An intent to purchase business agreement is the first step to securing a new business and make your plans formally known.3 min read
An intent to purchase business agreement is the first step to securing a new business and make your plans formally known. Buying a business or creating a joint venture can be a long process that requires many steps and paperwork. The letter of intent is one of the most important parts of the journey because it sets the guidelines and expectations for the entire process.
Letter of Intent for Business
A letter of intent for business can also be called a memo of agreement or memo of understanding. It sets out the process for buying an existing company and finalizing the deal. Either party can walk away at any point during the sales process, but the letter of intent is an agreement to move towards the completion of the deal.
An intent to purchase business agreement isn't legally binding and is simply a notice to begin negotiations to purchase a business. It is a way to put into writing the tentative agreement that was most likely made verbally between the two parties.
When negotiations begin, the letter of intent can be the starting point for discussions, and both parties can refer back to it to remember the original scope of the deal. If a letter of intent is detailed and well-written, it can facilitate negotiations so that they run more smoothly and also help to avoid any potential misunderstandings down the road. It starts both parties on the same page by outlining their goals for the deal and any assumptions they have.
The letter of intent is typically signed at the beginning of the process to buy or sell a business, usually as soon as both parties agree that they want to move forward with the deal and are ready to discuss it in more detail.
Purpose of a Letter of Intent
The letter of intent or intent to purchase business agreement is important for both parties. For the buyer, the letter of intent details the information they need from the seller to make an informed decision of if they want to actually buy the business.
The letter allows the buyer “right of first refusal.” This is added protection for the buyer because the seller agrees to put the buyer first in line to buy the business, even if other potential buyers may come forward later. Without the right of first refusal, the buyer runs the risk of investing time and money to find out if they are really interested in purchasing the business, only to have the seller make the final deal with someone else.
For the seller, the letter of intent shows that the buyer is at least somewhat serious about purchasing the company. With a letter of intent, the seller can get more information about the buyer's finances and business experience to know if they are a good fit to purchase the company.
Non-Binding Letter of Intent
A letter of intent doesn't bind either party to the sale of the business. It simply states that both sides are interested in moving forward. If the letter were a legally binding contract, both parties would have to honor the terms or risk being taken to court if they didn't keep their side of the promise. Because the letter isn't legally binding, either party can cancel the letter if they no longer want to pursue the sale. The process for canceling the letter is outlined in the letter of intent itself.
However, some of the terms of the letter can be legally binding. If the seller grants the right of first refusal to the buyer and then ends up selling the company to someone else, the buyer is able to take the seller to court for not following through on the agreement.
Long and Short Letters of Intent
Letters of intent can either be long-form or short-form. A long letter of intent can be helpful for a number of reasons, including:
- Issues can be resolved early in the negotiation process, which helps avoid wasting time and money on legal proceedings later.
- Getting significant issues settled early on helps the rest of the process run more smoothly and efficiently.
- If large issues arise for either party, they can cancel the deal before they have invested too much time and resources on it.
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