In regards to the purchase and sale of an early childhood business (daycare or school), a Letter of Intent (“LOI”) is a written statement that expresses the intention of the participating parties to enter into a formal agreement. An LOI is not a formal agreement or a binding contract. The LOI serves 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 a Purchase Agreement.
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 sales agreement. The following information is found in a well structured LOI:
TO. 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 together with their corporate titles … President, Secretary, Partner, Managing Member … etc .
vs. Contact information for 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: Assets of ABC Childcare, Inc. and real estate 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 deposit in good faith of the buyer and the company responsible for depositing the deposit.
GRAM. Transaction Terms-Examples: All cash at closing … or $ 2,000,000 cash and $ 250,000 payable at closing.
H. Information regarding any lease that the buyer must enter into. 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 lease rate will be the lesser of the CPI or 2.5% of the previous year’s rent. Again, the LOI is not drafting the lease. Just set the primary terms.
I. Transaction contingencies. Contingencies are items that would likely cause the buyer, seller, or both to walk away from the transaction in the event of a disagreement. For instance:
I. All cash and accounts receivable increased up to the closing date will remain the property of the SELLER.
ii. Buyer’s good faith deposit will be refunded in full should buyer’s due diligence reveal 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 sent 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 on or before … the closing date to provide flexibility to the parties involved. Unless terms to the contrary or “timeline contingencies” are stated, it must also be stated that the buyer and seller agree that the buyer has the exclusive right to purchase said assets up to and including the Closing Date.
K. Timeline contingencies – These contingencies are what keep a transaction moving at a timely pace. While almost every transaction will have its challenges, it is important to take a close look at the amount of time used for the various threads, such as finalizing the purchase agreement, securing financing, obtaining license approval, completing Phase One inspections. , get a real estate appraisal. , have staff fingerprints taken (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 more normal 90 days. Some examples of timeline contingencies are as follows:
I. This LOI is no longer valid if it is not fully executed on or before date X.
ii. The buyer agrees to provide the first draft of the purchase agreement on or before date X.
iii. The buyer agrees to submit the completed financing application to the chosen lender on or before date X.
iv. Buyer’s lending institution will inform XYZ Brokerage, Inc. of preliminary approval of buyer financing on or before date X.
v. The buyer’s lender will inform XYZ Brokerage, Inc. of the buyer’s final financing approval two weeks prior to the closing date.
saw. The seller agrees to notify the state licensee of the pending transaction within three days of receipt of the fully executed purchase-sale agreement and notification of the buyer’s receipt of the buyer’s lender’s commitment letter.
L. A simple but sometimes overlooked item. Include language that allows partners to sign the LOI. Again, this is a small item, but it can save you days in the process.
A letter of intent is an excellent tool to help get your transaction off to a good start and close 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.