Letters of intent are an attempt to put in writing all the potential deal-breaking points in a sale.
If you're planning a major purchase or sale -- whether of a company or a key asset or a division -- a well-crafted letter of intent can help you avoid costly hitches later on. And since you can do it yourself, it costs virtually nothing.
"These letters represent a commonsense attempt to put in writing all the potential deal-breaking points in a sale," explains Roger Knight, a director in the national mergers-and-acquisitions group of Coopers & Lybrand in New York City. "Buyers and sellers use these to make certain they're going to be able to come to a meeting of the minds before they start spending on costly legal or banking fees."
Here's a quick blueprint for a letter of intent (the buyer generally writes the first draft, which then gets tinkered with by all parties): Be brief. "In somewhere between one and six pages, elaborate on all the key points of your deal," says Knight. Don't bother to include all kinds of legal caveats: letters of intent are generally nonbinding documents that almost always leave buyers or sellers room to pull out if they get cold feet.
Cover the finances. Include all relevant details, including purchase terms (total costs, cash versus securities payments, immediate and future payment schedules), as well as conditions for closing.
Be thorough. If the buyer insists on supplier commitments (such as pricing levels) -- and the seller knows they will be impossible to obtain -- you're better off discovering that during the letter-of-intent stage, says Knight, "before you embark on more costly stages, such as due-diligence investigations and financing applications."
Do it yourself. "Let your lawyer and financial adviser read your letter of intent, but there's no reason to pay costly fees to have anyone else write or amend it unless you're averse to writing. After all, by this point in negotiations, you probably know the deal best."