A long, long time ago, businesses were closed with a firm handshake.
This meant the deal was sealed and both parties honored that commitment.
However, the current days don’t simply rely on handshakes to close a deal.
We’re not saying people don’t honor their commitments anymore, but some may forget that actions have consequences.
That’s where a Letter of Intent comes in.
Letter of Intent – What is it
A Letter of Intent (LOI) is a document that substitutes the commitment of the handshake.
One great example of a LOI you signed yourself is on the purchase of your house.
When signing it, both parties involved in the business are committing to one another to work and follow on that sale process.
It’s a big deal when selling a business as this is often where the deal becomes 90% sealed.
Afterwards, it’s a matter of fixing some minor details and getting the business up and running.
Why is a LOI so important in business
We found that Investopedia had a great sum-up of the 3 most important aspects on why a Letter of Intent is so important for business.
According to them, LOIs aim to achieve the following:
- Clarify which key points of a deal must be negotiated.
- Protect all parties involved in the deal.
- Announce the nature of the deal, such as a joint venture or a merger between two companies.
This is actually the perfect summary of why we use Letters of Intent to promote the selling and buying of a business.
Since the LOI includes all key elements and aspects of a business deal it becomes an excellent summary of what the business transaction will include.
What to include in a LOI
The structure of a letter of intent may change depending on the business transaction itself.
However, due to the nature of a LOI, some key elements must be present at all times to ensure the document is, indeed, helping the buyer and the seller.
Overall deal description
This is where you’ll write a summary or outline of all the things that are important to the deal, such as:
- Purchase price;
- Financing details;
- Exit dates & Strategy;
- Etc.
If it helps, think of it as a sort of Introduction. Which, in turn, will help clarify what other important chapters are coming up in the document.
Business assets
What is actually included in the deal?
The website? Any software? Warehouses?
What about the trademark? Will it be transferred to the future buyer?
When analyzing the potential sale of an eCommerce business, all of these aspects may be discussed.
Otherwise, you may be looking at a sale gone wrong.
Contact AEPIC Partners for a free call if you need help with selling an eCommerce business.
Deal timeline
This will help you (as a seller) and your potential buyer since it will clarify the timings for everyone.
On the buyer’s side, they’ll know how and when to conduct due diligence to ensure the business goes through.
On the seller’s side, you’ll be aware of all the timings from the buyer and ensure you’ll have time yourself to prepare your Exit and all necessary documents and paperwork.
Exclusivity & Deposit
Two things we strongly advise you to include in your Letter of Intent is the exclusivity and deposit terms.
The deposit, as you may know, is a small sum paid by the interested party as a representation of good faith and actual interest in buying your business.
As for the exclusivity, you can choose to negotiate with that one particular buyer.
Or, on the other hand, having a non-exclusive deal, which may lead to you getting more business proposals from other buyers while presenting your LOI to the already interested parties.
Regardless of your choice on exclusivity, make sure you mention whether this is an exclusive deal or not.
Contingencies
As important as it is to outline all that happens if a business goes well, it is mandatory to state what sort of things could make the whole deal stop.
On the buyer’s side, contingencies often include having a look at your actual numbers to determine whether they’re real or not.
If the numbers don’t add up or something seems off, they may choose not to go through with the deal.
The same applies to sellers.
One example of a simple contingency is the deposit. If not paid until a specified due date, the business is cancelled.
Exit strategy
Definitely a “must include” as it will help both parties deliver and take over the business.
A good exit strategy is one where no-one even realizes the business was made.
Many business sales have gone wrong because there was no agreement on an Exit strategy and so everything seemed like a mess.
Remember you have your own way of working, your own ideas, and they’re not necessarily the same as someone else’s.
Always include an outline of an Exit strategy in your Letter of Intent.
Conclusion
A Letter of Intent is merely a written contract that helps both parties understand how a business transaction will work.
With this in mind, make sure you include all six aspects we’ve mentioned above and you’ll be guaranteed an easier business sale.
Don’t ever go into business without a LOI in hand. And don’t just think that a handshake is still a formal business proposal because it isn’t.
If you need help selling an eCommerce business, AEPIC Partners can help facilitate this by providing you with our immense experience in buying and selling.
Schedule a free, non-binding call and he’ll help you figure out the best course of action.
