Letter of Intent / Memorandum of Understanding
When the seller and the buyer first agree on terms, it would be advisable to record the agreement in writing prior to signing the formal purchase contract, to confirm the mutual understanding.
The letter of intent typically covers the following:
Principal commercial terms: type of transaction (e.g. share deal), purchase price and how this was agreed (e.g., multiple of last 3 years’ profit), payment terms (e.g., at signing), transition period (e.g. 6 months or 1 year), the agreement on real estate (e.g., rented to the business, with the rental amount pre-agreed for a specific duration)
Buyer’s conditions to closing:
Buyer’s satisfaction with diligence (e.g., engaging an accountant to examine the seller’s financial statements and assist with structuring and taxation, a lawyer to confirm no pending court cases); and,
Where applicable, approval of financing by the bank(s)
Timeframe to complete the conditions to closing (i.e., to complete diligence and achieve financing)
An exclusivity period, because the involvement of the above-mentioned professionals for diligence costs money so the exclusivity prevents the seller from agreeing another deal with others (otherwise, the seller would have to pay a “break fee”)
Confidentiality i.e., even if the acquisition does not go through, the buyer would be bound to keep the target company’s affairs confidential and cannot use the information obtained in diligence for another purpose (e.g., to open a “clone” business next door)
Trident Park, No. 1, Level 1,Mdina Road, Zone 2, Central Business District,Birkirkara CBD 2010, Malta
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