Anatomy of a Letter of Intent Part II

In the first post on the Anatomy of a Letter of Intent we covered the form of the transaction, how a seller is paid and what a buyer buys and doesn’t buy.  In this post, we will cover common purchase price adjustments, the sources of financing used by buyers and how a deal gets done.

We will continue to use this generic letter of intent as a template.

** **Purchase Price Adjustments: Let’s start with the easy one first…This asset transaction is structured as a debt-free/cash-free transaction so the Net Debt adjustment is meant to clarify what is considered debt and, therefore, remains an obligation of the seller not to be acquired by the buyer. If the buyer has to settle any debts, the purchase price would be reduced by these amounts.

Working capital adjustments are used in nearly all transactions to adjust the purchase price for movements in the working capital accounts (usually accounts receivable, inventory and accounts payable) between the execution of the letter of intent and closing. A working capital adjustment is designed to ensure that a business is sold with an appropriate level of working capital (usually defined as the working capital target). It is not designed to benefit or penalize either the buyer or seller. This is another tricky topic that I will cover in a future post.

Sources of Financing: This section is intended to provide the seller with comfort that Hadley Capital has the expertise and resources required to finance the acquisition. If a buyer will not or cannot provide specifics regarding their proposed sources of financing, a seller should question that buyer’s ability to complete the acquisition.

Conditions to Closing: This portion of the letter of intent highlights the expectations and obligations of both the buyer and seller and are often specific to the circumstances of the individual business. The conditions also outline important procedural items from due diligence to financing to negotiating legal documents (like a definitive purchase agreement).

Exclusivity: Buyers and sellers agree to a 90 – 120 days of exclusivity in order to focus their efforts on the steps required to get from a letter of intent to a closing. Generally, these steps include due diligence, financing and legal documentation. Hadley Capital typically closes a transaction 90 days after signing a letter of intent.


Miscellaneous Terms: This is pretty straight forward.


Hopefully Part I and Part II of this post are helpful to business owners contemplating a sale of their business or actively negotiating a letter of intent. It's obviously not a replacement for good legal counsel in a sale transaction…a topic probably worth yet another post.


Paul Wormley - General Partner

Paul joined Scott and Clay to raise Hadley Capital Fund I. He grew up in a family business environment and has spent his entire career working with small and emerging companies.

He currently works with Equustock, GT Golf Supplies, Open Sky Media, Pneu-Con, and Storflex. Previously he was the chairman of the board of directors for i-deal Optics and Centare, both former Hadley companies.

Paul is an outdoor enthusiast who enjoys fishing, hunting, riding motorbikes, Crossfit and an occasional craft beer. He works closely with a number of non-profit organizations including One Acre Fund and Trout & Salmon Foundation.

Paul is a graduate of the University of Colorado at Boulder and received an MBA from the Kellogg School of Management at Northwestern University. He and his wife, Rosemary, have three children.