Most letters of intent for the acquisition of a business are non-binding, that is, neither the purchaser nor the seller are obligated to close unless and until a purchase agreement is signed. Both sides therefore face the risk that the other side will back out of a deal and in the purchaser’s case, after it has invested substantial time and money. There are ways to minimize the risk of the seller backing out. The objective is to make it financially and legally difficult for the seller to reverse. A few of the ways to achieve this are listed below:
- The letter of intent should contain a statement prohibiting the seller from marketing the business while in negotiations with the purchaser;
- Negotiate for the letter of intent to be binding on the purchaser and the seller while maintaining the purchaser’s right to conduct due diligence and withdraw if not satisfied;
- Include in the letter of intent a breakup fee that the seller must pay; and
- Assume the transaction is beyond the letter of intent stage. Even though a purchase agreement is legally binding, a seller could still intentionally breach and back out. One way to protect yourself from this is to include a remedy in the agreement for specific performance, which would allow the purchaser to obtain an order from a court requiring the seller to perform under the agreement. The availability of this remedy varies from state to state.
By implementing the above steps, the purchaser can reduce the risk of a seller’s reverse.
ABOUT GLENN D. SOLOMON
Glenn D. Solomon Esq., is a principal at the law firm of Offit Kurman and has provided counsel to businesses and business owners for more than twenty-five years, with extensive experience in the purchase and sale of businesses, structuring ownership agreements, and advising companies in financial distress.
ABOUT OFFIT KURMAN
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