WHAT IS A LETTER OF INTENT AND HOW IS IT DIFFERENT FROM AN ASSET PURCHASE AGREEMENT
When purchasing a business in Texas, a letter of intent is a first step to putting some of the discussed terms in writing in order to move forward with the process. At this early phase, not all of the terms have been discussed or agreed. Potentially, the price is discussed but contingent on the results of due diligence to substantiate the value requested from the seller of the business.
A LETTER OF INTEREST DOES NOT MEAN THE DEAL IS DONE.
It is still very possible that the seller is shopping the business to other buyers, just as it is possible that the buyer is also considering other businesses. The LOI can include provisions for exclusivity, and depending on the parties this may be a negotiated term in order to proceed with the sales process. I am up front with my clients that the deal can still fall through if the due diligence doesn’t check out or the seller finds a buyer that skips the LOI step and perhaps bypasses due diligence to go straight to the asset purchase agreement.
THE ASSET PURCHASE AGREEMENT IS NECESSARY TO BIND THE PARTIES.
While a LOI can be binding on its own terms, it is often not binding as explicitly stated. An Asset Purchase Agreement is a binding agreement subject to certain terms and contingencies. Thus, the parties have agreed to the sale within a time period, for a price, and subject to certain conditions for due diligence, financing, real estate, franchise agreements, licenses, etc. Of course, pending the conditions being satisfied the deal can still fall apart. Typically, there is a deposit requested from the buyer, either placed in escrow or with an attorney in trust.
If you are considering purchasing or selling a Texas business and interested in a letter of intent or purchase agreement consultation, contact me for a free consultation. I work with small and large businesses on the buyer and seller side.