A letter of intent, also known as a letter of interest, outlines an arrangement for a business owner to sell assets or equity to a buyer at a specified price. A letter of intent to sell shares of a company outlines the proposed share price and the number of shares available. While the letter of intent does not carry the legal binding force of a contract, it does establish the terms of the share purchase agreement.
The first section of the letter of intent defines the participants in the agreement and the legal terms used throughout the letter. The letter defines the business selling the shares as the "seller" and the entity buying the shares as the "buyer" or "purchaser." The buyer and seller are collectively known as the "parties." The letter also defines "shares" as portions of the seller's outstanding capital stock. While these definitions may seem self-explanatory to the casual reader, they can be vitally important when negotiating the final sale.
Video of the Day
Terms of Sale
The terms of sale define the purchase price, the number of shares available and the payment structure for the shares. The letter of intent can outline a payment schedule for the purchaser, including initial deposits, payment amounts and due dates. For instance, a letter of intent can state that the seller will sell 10,000 shares to the purchaser for $2 million. The purchaser agrees to pay a $500,000 deposit, an initial payment of $750,000 and a final payment of $750,000 within three months.
Representations and Guarantees
The letter of intent must state that purchaser and seller guarantee they have the power to represent their respective parties. According to a sample letter of intent on the American Bar Association website, the seller "would make comprehensive representations and warranties" that it owns the stock and that the shares are "free and clear of all liens and encumbrances." The purchaser must attest it has the means and the legal authority to approve the purchase. The letter must also affirm that the participants have the power to complete the transaction on behalf of their parties.
Letters of intent can also include a section that outlines special conditions attached to the stock sale. Some of these conditions can include a time window for exclusive negotiation rights. This exclusivity prevents either party from looking for a better deal from outside interests and endangering the current agreement. Other conditions can include a clause preventing the seller from engaging in any activity that would reduce the value of the seller's shares prior to completing the transaction in order to increase the seller's profits from the sale.