What is a Letter of Intent?
A letter of intent is a negotiation tool commonly used in business acquisitions and mergers. It summarizes the major economic terms under which the parties are willing to proceed toward the negotiation of a definitive agreement. Typically, it is drafted by the buyer and countersigned by the seller.

Perhaps the most important purpose of a letter of intent is to establish certain "ground rules" for further negotiation such as confidentiality, freedom to pursue other transactions, publicity and allocation of expenses, without binding the parties to consummate the deal on specific economic terms. This protection can create an atmosphere of cooperation in which the parties are more willing to open their records for review and negotiate freely toward a formal agreement.

Additionally, the process forces the parties to focus on the major issues on which the deal is founded.

Unfortunately, dispute a common understanding among business people and legal practitioners that letters of intent are generally nonbinding, some courts have enforced their terms under certain circumstances. Because the letters are typically signed by the buyer and seller, and often signal the beginning of significant investments of time and money, the basic elements of a binding agreement (offer, acceptance and consideration) can often be found.

Although an agreement to negotiate a contract in the future purports to be nonbinding, some courts suggest that such an "agreement to agree" obligates the parties to negotiate in good faith toward a definitive agreement. This can limit a party's ability to withdraw arbitrarily from negotiation.

Tell Me About Due Diligence

This Acquisition Due Diligence Checklist was provided through the courtesy of the law firm of Stoel Rives LLP. NVST.com is pleased to have the opportunity to provide Stoel Rives' informative list which indicates a call-to-action rather than simply obtain-and-check-off that most lists imply.

This material is intended for general information purposes only, and should not be construed as legal advice or a legal opinion on specific facts or circumstances. You are urged to consult an experienced lawyer concerning your particular factual situation and any specific legal questions you may have.

Acquisition Due Diligence Checklist
The following list is not intended to be exhaustive, but rather to provide examples of the types of inquiries that a prospective buyer would typically make in the context of an acquisition. In any given situation, some of these inquiries will be unnecessary or inappropriate and other inquiries will be necessary.

SECTION I. CORPORATE RECORDS
A. Verify state of incorporation and good standing of seller and each subsidiary of seller in all relevant states.
B. Determine capitalization and authorized and issued shares of stock of seller and each subsidiary of seller.
C. Review articles of incorporation, bylaws, minute books, and stock books of seller and each subsidiary of seller.
D. Obtain copies of all correspondence and other communications with shareholders.
E. Obtain a shareholder list; inquire into the existence of warrants, options, and other rights to acquire shares; inquire regarding the existence of any agreements or other arrangements restricting the transfer or ownership of shares or the voting of shares.
F. Investigate whether any shares of stock of seller or any subsidiary have been issued in violation of federal or state securities laws.

SECTION II. FINANCIAL AND TAX INFORMATION
A. Obtain copies of financial statements of seller, both audited and unaudited, audited statements for the prior five years and unaudited interim statements for the prior year and the current year.
B. Obtain copies of all management representation letters, letters of legal counsel, and other correspondence furnished by or to the auditors of seller.
C. Obtain a list of all federal, state, and local taxing jurisdictions with which seller or any subsidiary of seller filed (or was required to file) tax returns for the prior five years.
D. Obtain copies of federal, state, and local tax returns and reports of seller and its subsidiaries for the prior five years, including property statements and assessments.
E. Review all tax return working papers and supporting documents.
F. Obtain copies of all documents and correspondence concerning any pending or threatened audit or tax claim against or refund claim by seller or any subsidiary and any waiver or extension of any statute of limitations.

SECTION III. INDEBTEDNESS
A. Investigate indebtedness of seller and subsidiaries, including a review of loan agreements, notes, mortgages, and security agreements. This should include a review of all financing arrangements, including sale and leaseback arrangements, capital leases, and installment purchases.
B. Review correspondence with lenders and computations demonstrating compliance with financial covenants.
C. Order UCC searches with respect to seller and each subsidiary.

SECTION IV. EMPLOYMENT AND LABOR MATTERS
A. Obtain a list of seller's officers, directors, and employees earning more than a specified level.
B. Obtain a schedule showing the total number of employees, their job classifications, average compensation, and location of employment
C. Obtain copies of all of seller's and subsidiaries' profit sharing, pension, retirement, deferred compensation, incentive compensation, stock option, health and welfare, and other benefit plans and all correspondence relating to such plans, including IRS determination letters, actuarial reports, and correspondence with the IRS, the Pension Benefit Guaranty Corporation, or the Department of Labor. Pay particular attention to retiree medical coverage and multi employer pension plan issues.
D. Obtain copies of all personnel policy booklets.
E. Obtain copies of all employment, consulting, termination, parachute, and indemnity agreements.
F. Obtain copies of all collective bargaining and other labor agreements.
G. Investigate all pending litigation or administrative matters involving employees, including discrimination charges, grievances, arbitration cases, workers compensation cases, OSHA cases, and similar matters.

SECTION V. REAL PROPERTY
A. Obtain address and legal description information for all real property.
B. Obtain copies of any title insurance policies issued with respect to real property of seller and each subsidiary; consider ordering title reports on all real property of seller and each subsidiary.
C. Obtain copies of all appraisals.
D. Obtain copies of all studies, site evaluations, and governmental filings and reports prepared by consultants or employees concerning the presence of hazardous materials or toxic substances on, under or about any property owned or leased by seller or any subsidiary.

SECTION VI. PERSONAL PROPERTY
A. Obtain a copy of the Continuing Property Record of seller or other list of all material assets, showing locations.
B. Obtain inventory breakdown and aging information.
C. Obtain information concerning all proprietary intellectual property such as patents and trademarks.
D. Obtain a list of bank accounts and safe deposit boxes and the names of all parties with authority for access.

SECTION VII. AGREEMENTS
Obtain copies of the following:
A. All agreements entered into pursuant to acquiring or merging with other businesses.
B. All real and personal property leases.
C. All partnership or joint venture agreements of any partnership in which seller or any subsidiary is a member. If partnership is material, additional due diligence will be necessary.
D. All agreements pertaining to product marketing, including all agreements with independent sales representatives, distributors, and franchisees.
E. All insurance agreements in force with respect to seller and each subsidiary.
F. Any brokerage or investment banker agreement.
G. All material agreements with customers, including warranties provided to customers.
H. All material agreements with vendors.
I. All licenses and sublicenses and all research and development agreements.
J. All agreements with officers, directors, and shareholders and their :affiliates.
K. All covenants not to compete, confidentiality agreements, and other restrictive agreements.
L. All agreements of guaranty or indemnification.
M. All form agreements used by seller or any subsidiary.
N. All material contracts not otherwise obtained under this list. A material contract is one calling for the payment or receipt by seller or a subsidiary of more than a specified dollar amount during any 12-month period.

SECTION VIII. SUPPLIER AND CUSTOMER INFORMATION
A. Obtain a list of seller's material customers showing annual dollar volume of sales.
B. Obtain a list of seller's material suppliers showing annual dollar volume of purchases.
C. Obtain any correspondence with customers or suppliers relating to complaints or disputes.

SECTION IX. COMPLIANCE WITH LAW AND INFORMATION
A. Obtain copies of each report or other document filed with governmental agencies that have regulatory power over or a contractual relationship with seller or a subsidiary.
B. Obtain a description of all litigation, administrative proceedings, governmental investigations, or inquiries, pending or threatened against or involving seller or any subsidiary.
C. Obtain a copy of all governmental licenses and permits and all judgments, orders, or decrees to which seller or any subsidiary is subject.
D. Obtain a description of the procedure used to ob domestication certificates from employees and to comply with immigration laws.
E. Perform an Environmental Liability Assessment to determine the existence of property contamination or illegal past practices) and an Environmental Compliance Audit (to determine the status of current environmental compliance in areas such as permits and contingency plans).

SECTION X. OTHER INFORMATION
A. Obtain documents describing seller's products or services such as promotional literature, brochures and newsletters.
B. Obtain copies of all business plans, offering memoranda, management reports, budgets, forecasts, and similar documents.

© 1995 Stoel Rives LLP

Negotiation and Closing of a Sale
Negotiations are one of the trickiest parts of buying a business. And as a buyer, you are unavoidably emotionally involved in the sale. A professional advisor who negotiates for you can maintain his objectivity and mediate between you and the seller for a successful transaction.

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