How to Write a Letter of Intent to Sell Shares of a Company
Receiving a first draft of a letter of intent if you’re the owner of a privately held business -- or writing the first draft if you’re negotiating to purchase shares of private company stock -- moves negotiations forward in a share acquisition transaction. Because there isn't a standard format for such a letter and the level of detail and potential legal implications are so serious, the American Bar Association, or ABA, recommends getting legal advice regardless of which side of the transaction you’re on. Even so, knowing how to write a letter of intent helps the buyer and seller know what to expect.
A letter of intent establishes a formal relationship between a business owner and a potential buyer about an intent to sell all or some shares of stock in a privately held business. It sets the stage for conducting final negotiations. A letter of intent can be structured in whatever way meets the needs of both parties: The format can be a short, informal letter or a long, contract-type agreement.
Specific inclusions depend on how a letter of intent is formatted. However, many include three to four sections, each focusing on a different aspect of the stock sale. A buyer and seller section typically provides the names and contact information for the business owner and potential buyer. It may outline the current state of negotiations. If the business owner and potential buyer live in different states, a governing law section identifies which state has jurisdiction over terms of the sale. An exclusive negotiation rights section sets a time frame for continuing negotiations and assures the buyer that a business owner won’t also negotiate with other potential buyers during this time. An optional special warranties section is often included to prevent the potential buyer from laying off the business’s current employees or eliminating their jobs if the share transaction goes through.
The wording of a letter of intent and the context in which words are applied are crucial, as both can be used to make sections and specific clauses in the letter legally binding. In addition, communications and actions independent of the letter can affect a legal interpretation of whether certain aspects of the letter represent a legal agreement. The ABA recommends that both parties should use definite, precise language and refrain from referring to any aspect of the sale orally or in email communications.
The potential buyer most often moves negotiations forward by sending the seller a first draft of a letter of intent. If you are the owner, review it carefully, as the ABA says most letters of intent are drafted in a way that favors the buyer. You have the option to create a second draft that modifies the letter and makes it more favorable to your situation. For example, you can remove any specifics about the purchase price and terms of the sale to make the focus of the letter more on intent rather than specifics. You can also modify the time frame in which negotiations must be complete before you can start negotiating with other potential buyers.