What is included in a letter of intent?
When it comes to the purchase and sale of an early education business (daycare centers or schools), a Letter of Intent (“LOI”) is a written statement expressing the intent of the participating parties to enter into a formal agreement. An LOI is not a formal agreement or binding contract. The LOI has the very important purpose of defining the agreed terms of a transaction so that there are no misunderstandings between the parties, but it does not provide the details found in an Agreement of Sale.
Letters of intent vary in length and amount of detail; however, the goal is to provide enough detail so that the main concerns are defined, but not so much that the document borders on a sale and purchase agreement. The following information is found in a well-structured LOI:
HAS. LOI date.
b. Names and Titles: This area should include the full names of the buying, selling and brokerage companies and the individual signatories of each of these companies along with their corporate titles…President, Secretary, Partner, Managing Member…etc .
against Contact details of each of the companies and their representatives.
d Asset Identification: The LOI must identify the assets that will be bought and sold in the transaction. For example: ABC Childcare, Inc. assets and real property held in the name of XYZ, LLC and used in the operations of ABC Childcare, Inc. Such assets and real estate are located at 123 Main Street, Any Town, Any State, 12345 .
ME. The purchase price.
F. Amount of the buyer’s good faith deposit and the company responsible for guarding the deposit.
GRAM. Transaction Terms-Examples: All Cash at Closing…or $2,000,000 Cash and $250,000 Promissory Note at Closing.
h Information regarding any lease to be entered into by the buyer. Example: Buyer and Seller agree to enter into a triple net lease with an original term of 10 years and three five-year options. Annual increases in the rental rate will be the CPI or 2.5% of the previous year’s rent, whichever is less. Again, the LOI is not drafting the lease. You’re just setting the primary terms.
I. Transaction contingencies. Contingencies are items that would likely cause the buyer, seller, or both to abandon the transaction in the event of a disagreement. For example:
i. All Cash and Accounts Receivable accumulated up to the closing date will remain the property of the SELLER.
ii. Buyer’s good faith deposit will be fully refunded in the event Buyer’s due diligence reveals unacceptable conditions.
iii. Buyer and Seller agree to pay their respective closing costs.
IV. Buyer’s good faith deposit will be fully refunded in the event buyer financing is denied and written verification is submitted to XYZ Brokerage, Inc. on or before July 1, 20XX.
v. Buyer will provide written verification of down payment funds in the amount of not less than $XXX,XXX upon signing the LOI.
saw. Buyer and Seller agree that Seller is responsible for payment of brokerage fees to XYZ Brokerage, Inc. in the amount of $XXX,XXX.
j Closing Date – The Closing Date should be set to On or Before… Closing Date to provide flexibility for the parties involved. Unless terms to the contrary or “schedule contingencies” are stated, it must also be stated that the buyer and seller agree that the buyer has the exclusive right to purchase such assets up to and including the Closing Date.
k Timeline contingencies: These contingencies are what keep a transaction moving forward at a timely pace. While almost every transaction will have its challenges, it’s important to keep a close eye on the amount of time used for the various sub-processes, such as finalizing the purchase agreement, securing financing, obtaining license approval, completing Phase One, get a real estate appraisal. , fingerprint staff (in some states)… etc. A delay in one process can cause delays in other processes until a transaction is extended to nine months instead of the normal 90 days. Some examples of timeline contingencies are as follows:
i. This LOI becomes invalid if it is not fully executed on or before date X.
ii. Buyer agrees to provide the first draft of the purchase agreement on or before date X.
iii. Buyer agrees to submit completed financing application to chosen lender on or before date X.
IV. The buyer’s lender will notify XYZ Brokerage, Inc. of the preliminary approval of the buyer’s financing on or before date X.
v. The buyer’s lender will notify XYZ Brokerage, Inc. of final approval of the buyer’s financing two weeks prior to the closing date.
saw. Seller agrees to notify the state license of the pending transaction within three days of receipt of the fully executed purchase agreement and notification of receipt of the Buyer’s Lender Commitment Letter.
he A simple object that is sometimes overlooked. Include language that allows the LOI to be signed by counterparties. Again, this is a small item but it can save you days in the process.
A letter of intent is a great tool to help get your transaction off to a good start and move toward closing more efficiently. While the information above is certainly not exhaustive, it does provide a great platform. As stated above, always consult the appropriate professional before acting.