An offer for a company names one price, and the seller collects it in pieces. Cash comes at closing. A holdback follows after a claims period, a seller note over years, and an earnout only if targets are met once the buyer runs the business.
The letter of intent guide
Made up for How to read a letter of intent for your company: two letters for the same company. Letter A offers $1,200,000 and settles $900,000 at closing with no conditions. Letter B offers $1,400,000, settles $700,000 at closing, and ties up to $400,000 to revenue targets measured over three years.
Two real sales in the guide went to the Delaware Supreme Court. In the sale of Appriva Medical, the merger agreement promised $50 million at closing and tied $175 million to four regulatory milestones. The milestones were not met, the former shareholders won a $175 million jury verdict, and in 2014 the court sent the contract claim back for a new trial (ev3, Inc. v. Lesh). In the sale of a Chicago Bridge and Iron subsidiary to Westinghouse for a price of zero, a working capital adjustment produced a claim of more than $2 billion, and in 2017 the court held that the adjustment covered only changes between signing and closing (Chicago Bridge and Iron Co. N.V. v. Westinghouse Electric Co.).
Rules that reach into the letter
When the buyer borrows through the SBA's 7(a) program, the SBA's rules bar a seller earnout, and a seller note counts toward the buyer's equity only if it takes no payments for the term of the loan. For tax, buyer and seller report the split of the price across asset classes on IRS Form 8594, trucks and equipment in one class and goodwill in another, and the split changes how much of the seller's gain is taxed as ordinary income. In the Appriva sale, three provisions of the letter of intent bound the parties: confidentiality, transferability and Appriva's talks with other buyers.
Reading path
- How to read a letter of intent for your company
What each common term in a letter of intent does to the money an owner receives, and when that money arrives.