The letter of intent when selling a business in Singapore

What a letter of intent is

Letter of intent, heads of terms, term sheet and memorandum of understanding are used almost interchangeably in Singapore deals. Each records the commercial deal the parties intend to sign, once due diligence is done and the sale and purchase agreement is agreed.

Most of the letter is expressed to be non-binding, so either side can still walk away. A few clauses are usually binding from signing: exclusivity, confidentiality, who pays which costs, and governing law. Whether a clause binds depends on the wording, so make the binding and non-binding parts explicit.

When it is signed

The letter of intent comes after first meetings and indicative offers, once you have chosen the buyer you want to proceed with, and before due diligence starts in earnest. It is often the moment the process switches from several interested buyers to one. Our guide to how to sell a business in Singapore shows where it sits in the timeline.

What it should cover

• What is being bought: the shares or the business and assets, and the parties
• The price and the basis for it, usually on a cash-free, debt-free basis with a normal level of working capital
• How it is paid: cash at completion, deferred payments, any earn-out and any retention
• Conditions: due diligence, financing, landlord consent, licences and other approvals
• Your role after the sale: how long you stay, in what capacity and on what terms
• Restrictions on you: the scope of any non-compete and non-solicit
• Key staff: who the buyer expects to keep, and on what terms
• Timetable to signing and completion
• Exclusivity, confidentiality and costs, stated to be binding

Our guide to deal structures explains each payment structure, and the guide to working capital and net debt explains the price adjustment.

Exclusivity: what it gives away

Exclusivity means you agree not to negotiate with other buyers for a period, so the buyer can spend money on due diligence and lawyers with confidence. It is reasonable to give, but once you have, the buyer knows your alternatives are on hold.

Protect yourself by:

• keeping the period short, often 30 to 90 days for an SME, and extendable only by agreement
• setting milestones, such as due diligence requests within a week and a first draft of the sale agreement within a set time
• providing that exclusivity ends if the buyer tries to cut the price without a specific due diligence finding

What to settle before you sign

Points left vague in the letter of intent tend to be decided later in the buyer’s favour. Before you sign, settle:

• Cash at completion, as a figure, not just the headline price
• Deferred payments and earn-outs: how much, when, on what measure and how they are secured
• The working capital assumption behind the price, and how debt and cash are treated
• What can reduce the price, ideally only specific due diligence findings
• Your time commitment after completion
• The broad shape of the warranties, including a cap on your liability, if the buyer will agree to it at this stage

Common mistakes

• Accepting a price range, or “subject to due diligence”, with no explanation of what would change it.
• Granting long or open-ended exclusivity.
• Agreeing binding obligations by accident, through loose wording.
• Signing without your lawyer and adviser reviewing it.
• Comparing offers on the headline price rather than the cash you actually receive and when.

The terms agreed here carry into the sale and purchase agreement, so time spent getting the letter right saves time and money later.