How to draw up a declaration of intent

You have shared all the key information about your business via the memorandum of sale and in further discussions with the buyer. Based on this, you draw up a declaration of intent for the sale of your business. You set out the main points of the key agreements before signing the final contracts. These include agreements such as what conditions would automatically cancel the sale (known as resolutive conditions) and the procedure you will follow.

Binding and non-binding agreements

In principle, either party may still withdraw before signing the purchase contract. However, this would be against the principle of acting fairly and in good faith. If one of you does withdraw anyway, the other party may claim compensation for costs incurred and even lost profits.

Contents of a declaration of intent

A declaration of intent should include the following points:

• Parties and period during which the declaration is valid.
  The names of the individuals or companies involved in the business acquisition and the period during which the declaration is valid.
• Description of the transaction 
  What exactly is being sold and acquired? This could include shares or assets/liabilities such as machinery. Set this out clearly to avoid any misunderstandings later.
• Payment 
  Also state how payment will be made, for example in a single instalment, via a phased transfer, or an earn-out arrangement. In an earn-out arrangement, part of the purchase price is paid later. This subsequent payment depends, for example, on the business’s results after the takeover date. This usually covers a period of 1 to 3 years.
• Confidentiality 
  Ensure that confidential information remains confidential. It is sensible to draw up a separate non-disclosure agreement. This is then confirmed again in the declaration of intent.
• Exclusivity clause 
  Also known as a Letter of Intent or LOI. Agree that you may not negotiate with another buyer for a specified number of months. This gives the buyer certainty that they will not be outbid during the due diligence process. And the buyer knows that the time and money they will invest in the due diligence will not be wasted.
• Negotiation schedule 
  What is the expected timeline for the process? Agree on specific dates well in advance, such as when the buyer will verify your details through the due diligence process, when the purchase agreement will be signed, and what the transfer date will be.
• Valuation methodology and sale price 
  Set out how you will determine the value and sale price of the business.
• Non-solicitation clause 
  This clause means one party will not approach employees of the other party with an offer to come and work for them.
• Legal status (also known as a non-binding clause) 
  The declaration of intent is not a definitive contract, meaning that neither party is yet legally obliged to complete the transaction. Here, for example, you state that the actual business takeover is subject to the results of a due diligence review or the securing of financing. However, there are also binding elements such as confidentiality and exclusivity. You should also mention these here.
• Dispute resolution 
  Agree on how you will handle conflicts that arise during the preliminary phase of the acquisition. For example, regarding the outcome of the due diligence or compliance with exclusivity or confidentiality.
• Role of the seller after the transfer (optional) 
  Will you, as the seller, remain involved after the sale, for example as an adviser or temporary managing director? If so, state this here.
• Non-compete clause 
  A non-compete clause protects the buyer. In this clause, you agree that, as the seller, you may not, for example, set up a new business within a certain distance of the current business, or work for a competing business within a certain period.

Keep it brief and seek advice

Declarations of intent are short and to the point. Only set out the agreements necessary for the purpose of the declaration. If you make it too long, you run the risk of it resembling the final agreement too closely. Seek help from an expert adviser or lawyer at this stage of the negotiations.

Next step: due diligence

Before the business takeover is finalised, the buyer will carry out a due diligence review. Through due diligence, the buyer checks whether the information you have provided about your business is accurate.