As it pertains to the buying and selling of an early education company (childcare centers or schools), a Letter of Intent (“LOI”) is a written statement expressing the intention of the participating parties to enter into a formal agreement. A LOI is not a formal agreement or a binding contract. The LOI serves the very important purpose of defining the agreed upon terms of a transaction so there are no misunderstandings between the parties, but it does not provide the detail found in a Purchase Sale Agreement.
Letters of Intent vary in length and amount of detail; however, the goal is to provide enough detail so the major concerns are defined but not so much detail that the document borders on a purchase sale agreement. The following information is found in a well-structured LOI:
A. Date of the LOI.
B. Names and Titles–This area should include the complete names of the buying, selling and brokerage companies and the individual signatories for each of these companies along with their corporate titles…President, Secretary, Partner, Managing Member…etc.
C. Contact information for each of the companies and their representatives.
D. Asset Identification–The LOI should identify the assets to 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 operations of ABC Childcare, Inc. Said assets and real estate are located at 123 Main Street, Any Town, Any State, 12345.
E. The Purchase Price.
F. Amount of buyer’s good faith deposit and the company responsible for escrowing the deposit.
G. Terms of the transaction—Examples: All Cash at Closing…or $2,000,000 Cash and $250,000 Promissory Note at Closing.
H. Information pertaining to 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 lease rate will be the lesser of CPI or 2.5% of prior year’s rent. Again, the LOI is not drafting the lease. It is only establishing the primary terms.
I. Transaction Contingencies. Contingencies are items that would likely cause the buyer, seller or both to walk away from the transaction should there be a disagreement. For examples:
i. All Cash and Accounts receivable accrued up to the closing date will remain the property of the SELLER.
ii. Buyer’s Good Faith Deposit will be refunded in full in the event buyer’s due diligence reveals unacceptable conditions.
iii. Buyer and Seller each agree to pay their respective closing costs.
iv. Buyer’s Good Faith Deposit will be refunded in full in the event buyer’s 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 no less than $XXX,XXX upon signing of LOI.
vi. Buyer and seller agree that seller is responsible for the payment of brokerage fees to XYZ Brokerage, Inc. in the amount of $XXX,XXX.
J. Closing Date—The Closing Date should be stated as On or Before…the Closing Date to provide flexibility to parties involved. Unless there are stated terms to the contrary or “timeline contingencies”, it should also be stated the buyer and seller agree that that the buyer has exclusive right to purchase said assets up to and including the Closing Date.
K. Timeline Contingencies—These contingencies are the ones that keep a transaction moving forward at a timely pace. While nearly every transaction will have its challenges, it is important to closely watch the amount of time used for the various sub-processes like finishing the purchase sale agreement, securing financing, getting licensing approval, completing Phase One inspections, getting a real estate appraisal, having staff fingerprinted (in some states)…etc. A delay in one process can cause delays in other processes until a transaction stretches to nine months instead of the more 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 X date.
ii. Buyer agrees to provide first draft of purchase sale agreement on or before X date.
iii. Buyer agrees to submit completed financing application to chosen lender on or before X date.
iv. Buyer’s lending institution will inform BFS representative of preliminary approval of buyer’s financing on or before X date.
v. Buyer’s lending institution will inform BFS representative of final approval of buyer’s financing two weeks before Closing Date.
vi. Seller agrees to notify state licensing of pending transaction within three days of receiving fully executed purchase sale agreement and notification of buyer’s receipt of Commitment Letter from buyer’s lender.
L. A simple but sometimes overlooked item. Include language that allows the LOI to be signed in counter-parts. Again, this is a small item but it can save you days in the process.
A Letter of Intent is a terrific tool for helping to get your transaction off to good start and moving it toward closing more efficiently. While the information above certainly isn’t exhaustive, it provides a great platform. As stated above, always consult the proper professional before acting.
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(Legal Disclaimer: Always consult the proper professionals before taking action. By and before the use of the information provided herein, reader agrees that BFS® is not responsible for viewer’s actions related to said information.)