Selling Your Business (1) – Letter of Intent

Many business-owners look to sell at some point. The reasons for selling may vary but often it is the opportunity for the owner to capitalize on the years of hard work that have gone into building up his or her business.
 
Poland has been constantly progressing ever since the fall of the communist regime in 1989. The country successfully managed to catch up with other competitive countries in the area and has now become a country preferred by foreign investors. Many Polish small and medium enterprises have grown during the last 30 year and now the Polish business-owners look for opportunities to sell their businesses and look forward to receiving the offers from potential buyers.
 
There are many ways of managing a sale process from the perspective of a business-owner. The most common scenario for SMEs is signing the letter of intent, carrying out the due diligence analysis and signing the sale and purchase agreement. This is the traditional model.
 
For many, selling will be a once-in-a-lifetime event and they will need an assistance from M&A lawyers and corporate finance advisors.
 
The first step in the process (following the receipt of the satisfactory offer in a letter or email from a buyer), will be preparing and signing the letter of intent (also known as “heads of terms” or a “term sheet”). It should set out the key terms of the deal that have been agreed in principle (in a combination of face-to-face meetings and correspondence). This letter, which is usually non-legally binding, should ideally set out:
 
a) The financial terms.

b) The form that the purchase price will take if any of it is to be in non-cash forms, such as loan notes or shares in the buyer.

c) The deal timetable and target completion date.

d) Whether the buyer is to be granted a period of exclusivity and if so - for how long. 

Exclusivity does not mean there is any commitment on either side to complete the deal but just means that the seller agrees not to talk to other competing bidders during the exclusivity period. Most buyers will want this level of comfort before commiting to the significant time and expense involved in negotiating the detailed sale and purchase agreement.
 
e) Any conditions to which the buyer’s offer is subject, typically legal, commercial and financial due diligence, board approval, satisfactory tax structuring and agreement of definitive transaction documents.

Even though it is expressed as non-legally binding, the letter of intent is one of the most important documents in a transaction and will be referred back to at numerous times as the detailed negotiations proceed. A good letter of intent should cover the commercial points in enough detail to ensure that all the potential “show-stoppers” have been dealt with but should not go into comprehensive detail, as this is the job of the definitive documents. Its principal purpose is to enable the parties to proceed into the next stage of the transaction with the reasonable degree of confidence that they have a common understanding as to the main terms of the deal.
 
The letter of intent will generally contain some legally binding elements, such as provisions relating to confidentiality, exclusivity and responsibility for fees. These could be important if the negotiations break down for any reason and so should be reviewed by lawyers.
 
We at Woźniak Legal have extensive experience in guiding the parties in selling or buying businesses in Poland. We specialize in M&A/corporate law with a focus on tax, labour law and commercial contracts.