When a buyer has found an assisted living facility (or other business) that they want to purchase, one of the first steps in negotiating a deal is the letter of intent.
According to one definition, a letter of intent is a document outlining the potential terms and conditions of a yet to be finalized agreement between two or more parties. Letters of intent are normally used to begin the discussion about the price and other important business terms of a deal.
The letter of intent doesn’t contain all the terms and conditions. But it normally answers several questions that help the parties determine if they should continue discussions and attempt to formalize a binding purchase and sale agreement.
Here is a list of questions answered in most letters of intent:
1. Who is the buyer? Is the buyer an individual or a company? Yes, this matters. First of all, it is good to know the buyer’s capabilities and track record. Second, if the deal goes south, it’s good to know whether there is a real person or company that you’re dealing with, or just a shell company with no assets.
2. What is the purchase price? This one is obvious.
3. How much is the earnest money deposit? Also, when will it be paid and when, if ever, does it become non-refundable?
4. What is included? And what is excluded? If there is personal property or excess real estate on the property, it is important to know what is included. Many times, it’s easier and more effective to indicate that everything stays, except specific items that are listed in the letter.
5. What are the contingencies? Will the buyer need a financing contingency? Inspection contingency? Others? It’s certainly reasonable for a buyer to have contingencies. But it’s important to know that the list is reasonable, too.
6. What other conditions will the buyer require? Is there a non-compete agreement required? Is there a minimum occupancy at the facility required?
7. When will the sale close? This question is often answered not with a specific date, but a timeline based on other milestones in the transaction.
8. Who will pay which closing costs? While this question isn’t always addressed in a letter of intent, it can be helpful to know the buyer’s expectations for covering closing costs. Many closing costs are customarily the responsibility of the seller, such as title insurance and transfer tax. But some buyers might be expecting more – or less.
9. Is the letter of intent binding? It shouldn’t be binding and most aren’t. But make sure that it specifically says so, and consider checking with an attorney to make sure that a letter of intent doesn’t unintentionally become binding.
10. How long is the letter of intent available? Buyers often indicate how long their proposal stands. Of course, this is usually just a guideline because the letter isn’t binding on either party.
11. What is the next step? The letter of intent usually indicates what the next step will be after both parties sign. This step is often delivering the approved letter of intent to their attorney for preparation of a binding purchase agreement.
All transactions are different and each letter of intent is unique. So the list of questions answered by your letter of intent will be different too. Check with your attorney for more information about what to include and not include in your own letter of intent.
Special Note: This information is not intended to be legal advice – just good business advice. Always consult your own attorney or legal advisor to make sure you’re covered.