Surely you have heard of the phrase “the words are gone with the wind”. Keep this phrase in mind when planning your M&A strategy. You need to understand that there is a big difference between a handshake with an oral agreement and a letter of intent. When buying a business, you need to write everything down. This is necessary because ambiguities are created during conversations between them. This is called selective hearing when you only hear and hear what works best for them. Maybe you didn`t know it, but during a negotiation, three conversations take place: the seller`s conversation with himself, the buyer`s conversation with himself, and the conversation between them. It often happens that when one speaks, the other does not listen because he is invested in talking to himself or thinking about what he will say next. Therefore, such a dialogue occurs: a letter of intent is a set of key points of an agreement between two parties negotiating a contract; In this regard, a letter of intent is simply the agreement that was signed prior to the final contract. Without formality, the letter of intent aims to recognize the willingness of the parties to carry out in the near future all the steps necessary for the execution of a contract that gives way to a transaction in international business. It is a mutual declaration of will, without binding effect, but with great ethical value for the parties who sign.
The objectives of the MEMOR are as follows: The letter of intent is what you will present to the banks so that they can start financing what has been agreed. Don`t let “words go with the wind” if you really want to buy the business. As the days go by, the world in which we participate becomes more and more globalized, the purchase of a company presents itself as a great way to access new markets or strengthen a competitive position. The biggest challenge that arises from these opportunities is how to approach them in order to maximize profits and not be fooled. If you are thinking of buying a business and are looking for advice, do not hesitate to contact us for strategic advice! A letter of intent is a document that explains a party`s provisional obligation to do business with another party. The letter describes the key terms of a potential agreement. Letters of intent are often used in large business transactions and are similar in content to term sheets. However, a major difference between the two is that letters of intent are represented in letter formats, while term sheets are listicle. Letters of intent also have applications outside the business world. For example, parents can use them to express the expectations they have of their children in case both parents die. Although these are not legal documents such as wills, family judges can be considered by family judges who are responsible for legislating what happens to children in such circumstances. Another feature of letters of intent is that they may resemble a written contract, but are generally not binding on the parties in their entirety.
However, most of these agreements contain binding provisions such as confidentiality and non-competition obligations. There are different types of letters of intent in international trade. The most common are: letter of intent for international sale, letter of intent for international distribution and letter of intent for joint venture. The Letter of Intent (LOI) is a relevant document for the sale of a business because of its implicit skills. This document contains the main points agreed between the buyer and the seller. In various cases, it is determined what due diligence will cover, but of course, the seller must facilitate the information required for due diligence. The agreement should include, if the business involves capital expansions, the purchase of financial assets and financial liabilities or shares, the price, the percentage at the time of purchase, the payment method used, the terms of payment, the price adjustment formula and any other type of reimbursement (advice fees for the buyer). This does not necessarily mean that the seller is a liar, he simply did not listen. In this Agreement, you must specify that the business will continue in the manner specified until purchase.
It remains intact and without significant changes in working capital or in the relationship with suppliers and principals; you may not distribute dividends, incur extraordinary expenses or sell financial assets; It is forbidden to sign contracts other than those of the normal management, to modify salary or compensation plans, etc. This type of promotion requires the written permission of the buyer. In commercial transactions, letters of intent are usually prepared by a company`s legal team, which defines the details of the proposed action. In the M&A process, for example, letters of intent describe whether a company plans to acquire another company with cash or through a stock transaction. Letters of intent are useful when two parties are first brought together to determine the broad outlines of a transaction before the intricacies of a transaction are resolved. Letters of intent often contain provisions that state that an agreement can only be entered into if funding has been secured by one or both parties, or that an agreement can be broken if documents are not signed by a certain date. In addition, it is recommended to enter into an agreement stipulating that if the seller withdraws or leaves the sale, he must bear the costs of due diligence. This is crucial because the seller may become nostalgic in the final stages of the sale and cancel the process. A confidentiality agreement and an exclusivity clause (in which the seller cannot negotiate with other buyers) that expires carefully and a commercial contract.
Often, a deadline is set for signing the contract and a schedule of financial benefits. For this reason, it is important that your advisors write a letter of intent on everything that has been agreed between the seller and the buyer and, if possible, that both parties sign the document. Letters are the key to a smooth business process. Letters of intent can be iterative in nature. One party may submit a letter of intent that the other party can either counter with an optimized version of that letter of intent or create a new document. Ideally, when the two sides come together to formalize an agreement, there will be no surprises on either side of the table. Letters of Intent can be used by different parties for many purposes. The parties can use a letter of intent to describe some of the basic terms of an agreement before negotiating and finalizing all the subtleties and details. In addition, the letter of intent can be used to signal that two parties are negotiating an agreement such as a merger or joint venture (JV).
You must condition the validity of the agreement until you are satisfied with the due diligence to obtain the necessary financing from the banks and, of course, until there are no significant changes in the financial or operational aspects of the business. If you`d like to learn more about how to write a letter of intent, download our eBook here. It is crucial that all relevant aspects of the agreement are written down, as you, as a buyer, then invest in auditors and legal advisors. While it is true that the most important and relevant points were not addressed in the letter of intent, it is possible that the process collapses and everyone involved has wasted their time and, in your case, a lot of money. Many letters of intent contain non-disclosure agreements (NDAs) that contractually determine which parts of a company are confidential to both parties and which details can be shared publicly. Many letters of intent also contain non-solicitation provisions that prohibit one party from poaching the other party`s employees. Letters of Intent are also used by those applying for government grants and by highly sought-after high school varsity athletes. These individuals often write memoranda of understanding to explain their obligations to attend certain colleges or universities. (For more information, see “To what extent is a letter of intent legally binding?”) Since letters of intent usually discuss potential points of agreements that have not yet been cemented, they are said to be not binding almost everywhere. There may be a take of the type of bank debt used for the purchase. .