What Is The Letter Of Intent?

Following the agreement of a price between you and the would-be acquirer of your business, getting from the point where you’ve shaken hands to the day of completion where transfer of ownership occurs can take many weeks or months.

The sale and purchase of a business, particularly share sales, requires a sales and purchase agreement – an extensive legally binding contract governing the transaction often running into hundreds of pages.

When purchasing a business, the acquirer is putting their capital at risk, particularly if the acquirer has little or no experience in your sector. Their accountants and solicitors have a legal duty to protect them from risk and they take this duty seriously – in fact, this can often create an adversarial atmosphere between your professional advisors and their professional advisors.

To try to reduce as much friction in the process as possible, it’s common for the professional advisors involved to draw up a letter of intent as a roadmap for both parties to follow. The letter of intent is sometimes referred to as a “heads of terms” or a “memorandum of understanding”.

In this article, we consider:

● how business sales happen – what the procedure is

● drawing up the letter of intent

● whether letters of intent are legally binding

● how acquirers and their advisors treat letters of intent

● the deal progression team at IBA Corporate and why you need this


For business owners selling their company, the route to the completion of a sale is as follows:

1. drawing up of marketing materials

2. initial marketing of your business to interested parties

3. dispatch of an information memorandum following the signing of a non-disclosure agreement

4. testing of an enquirer’s level of interest

5. attempt to create a competitor buying environment between potential acquirers

6. meetings with potential acquirers

7. selection by you from offers made of a purchaser

8. verbal agreement of a price and a timetable between you and the purchaser

9. drawing up of a letter of intent

10. due diligence begins

11. drawing up of a sale and purchase agreement (the document governing the purchase)

12. agreement over completion accounts

13. day of completion (when the shares in or selected assets owned by your company transfer ownership)

14. payment of initial consideration for your old company/asset(s)

Getting from point 9 to point 14 may take weeks or months but the general speed and direction of travel is always set by the letter of intent.


Upon agreeing a price, your solicitors and your acquirer’s solicitor will advise that the letter of intent is written. Either party can do this however you may wish your solicitor to draw up the letter of intent so that you have more control over the process.

In addition to setting out the roadmap for the purchase, the letter of intent often gives the potential acquirer the right of first refusal (effective exclusivity) and it gives you as the seller confidence that the acquirer is serious and has access to the funds required. Letters of intent normally grant you the right to inspect an acquirer’s financial position to satisfy yourself that they are not wasting your time.

On some occasions, your buyer may set pre-conditions requiring you to submit company documentation so that they can verify certain key facts and figures about your business. They may also require proof that all shareholders are in favour of selling the business and that there are no third parties which may block the takeover.

The letter of intent should include sections on:

● the two parties involved – this is more important for the seller because, if something goes wrong with the deal post-completion, you need to know which entity bought your business. You may wish to raise concerns if a prospective buyer proposes using a newly-created, non-trading holding company to purchase your business as the possibility of meaningful legal recourse to recover any unpaid monies diminishes in these circumstances.

● what you are selling and what they are buying – is it the company shares or is it the assets of the company?

● how you will be paid – will you be paid in cash, in shares in the acquiring business, or in some other way? Will you retain a shareholding in your existing company or gain a shareholding in a trading and profitable entity owned by the purchaser? If you are paid in multiple stages, how much and when? Will the amount you receive be affected by the financial performance of the company post-ownership?

● adjustments – will the purchase price be affected by the completion accounts and how? In what other ways could you be financially penalised and for how much?

● closing conditions – does the buyer need to gain approval from government agencies or other interested parties to proceed with the transaction? If this is the case, how will this be dealt with?


We generally advise that all sellers include provisions against solicitation of your staff and a promise to respect confidentiality as legally binding in a letter of intent however.

In most cases, we would recommend that the letter of intent gives you and the acquirer the means to cancel the deal at any time without penalty.

If you want the ability to negotiate with other buyers during the process, you should ask your solicitor to ensure that this provision is included in the letter of intent although this may make many prospective acquirers far more reluctant to continue because they may perceive that there is less chance of the deal going through.


IBA Corporate has an experienced in-house deal progression team whose responsibility is to make sure that there is minimal friction between you, your buyer, and both sets of professional advisors from the time an offer is made and accepted to the drawing up of a letter of intent right through due diligence to completion day.

To find out more about our deal progression team and working with IBA Corporate on the successful sale of your business, please get in touch with us.

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