A letter of intent to purchase a business is the buyer's statement of what they will do and on what terms, subject to diligence. Six clauses matter. One of them, the structure, decides which tax forms both parties will file and is frequently agreed without either side realising what it commits them to. This page sets out the six from the buyer's side and what each one is actually deciding.
Consideration, and what it is calculated on
The headline and its basis: cash-free debt-free with a working capital target is standard and the target is where the arithmetic lives. Two parties can agree a number and still be several hundred thousand apart once the mechanism is drafted, which is why the mechanism belongs in the letter rather than later.
Structure, which decides the tax forms
Assets or shares. An asset purchase requires the parties to agree an allocation across asset classes and file it, which is what IRS Form 8594 exists for, and it changes the seller's tax position materially. Buyers usually prefer assets and sellers usually prefer shares, and the gap is negotiable in price.
Payment timing, including anything deferred
What is paid at close, what is held in escrow, and any earn-out with its measurement. Deferred consideration paid over more than one tax year is an installment sale with its own treatment, which is worth understanding before agreeing to it rather than after.
Exclusivity, conditions and confidentiality
The period, what has to be true to close, and the confidentiality that survives either way. Exclusivity is the clause the seller pays for: it removes the competitive tension that produced the price, so its length is the term worth negotiating hardest.
Questions people ask about letter of intent to purchase business
Assets or shares?
Buyers usually prefer assets and sellers shares. An asset purchase requires an agreed allocation filed on Form 8594 and changes the seller's tax position.
What is the seller giving up by signing?
The competitive tension that produced the price, for thirty to ninety days, with one counterparty who now knows there is nobody else.
Does deferred consideration change the tax position?
Yes. Consideration paid across more than one tax year is an installment sale with its own treatment, which is worth understanding before agreeing.