A franchising letter of Intent is the formal agreement between a franchisor and a franchisee that outlines the terms and conditions of the agreement such as payments, diligence periods, sanctions, and other conditions that have been extensively analyzed by both parties.
This letter is a result of an agreement between the franchisee and franchisor. In addition, it offers both parties the opportunity to review the outlined terms and conditions of the franchise before any final decisions are made and the contract is signed.
A letter of intent is also a non-binding agreement that only explains in vivid detail the interest of the franchisee in the franchise business purchase. The terms and conditions outlined by the franchisor necessitate due diligence from the franchisee before the final agreement.
Howbeit, a good number of franchisors don’t utilize Letters of Intent with prospective franchisees. A Letter of Intent can play a very vital role at the very beginning of a franchise deal and can often help franchisees get an in-depth understanding of the business.
There are two types of documents used at the very beginning before the franchise or multi-unit agreement is signed by both parties:
- Term Sheets
- Letters of Intent
Both are non-binding though unless stated.
Term Sheets are less formal especially if they note the key points of a deal in bullet points or list format. A Letter of Intent outlines the terms of the agreement in a letter or agreement format.
Franchisors may prefer to leverage a Letter of Intent when a potential franchise is going to purchase a single unit, multiple units, or company units, or in some cases, when the potential franchisee is entering into an area developer agreement.
Letters of Intent are even more common in international franchise deals. Note that the letter of intent validates the parties’ understanding of the terms of the transaction and also serves as a guide for the attorneys who will draft the final agreements.
There are some reasons why a Letter of Intent should be used in franchise transactions. Some lenders do ask for a Letter of Intent before approving a loan. In international franchise deals, the Letter of Intent will have to be drafted in one language and then translated into another to ensure that everyone is on the same page.
If a franchisor uses the same Letter of Intent with every franchise, the franchisor must include the standard form of that Letter in their Franchise Disclosure Document.
Key Terms To Address In Your Letter Of Intent
If you are looking to venture into entrepreneurship by buying a franchise location from another business, you must leverage your letter of intent expertly as a negotiating tool. It is advisable that you also leverage experienced advisors at this particular stage of the process.
However, always consider your letter of intent as a doorway into negotiations for what you want in the deal. Nonetheless, key terms to address in your letter of intent include:
- Purchase price and payment terms. As a buyer, you must consider whether to include a financing contingency or request seller financing.
- Transaction structure, such as an asset or equity acquisition. You will have to include a list of key assets to be purchased.
- Earn out terms. You need to be very clear on when and how the earn-out will be measured and earned. The franchisor will also have to consider the earn-out as a bonus rather than a guaranteed purchase price.
- Working capital targets and adjustments. This entails that parties need to be very detailed about what their targets are.
- Holdbacks and escrows, such as for indemnification, including amounts and terms.
- Limitations on liability, such as any baskets or caps, and the survival period for representations and warranties.
- Terms of restrictive covenants, including non-compete and non-solicit restrictions.
- Any specific indemnification that you will require
- Exclusivity or “no shop” period for negotiations and any “break up” fees.
Sample Franchising Letter of Intent for Anytime Fitness
(Name of recipient)
It is with great interest that I am writing this letter to apply as a franchisee of the Anytime Fitness franchise. I have carried out extensive research about your business and find it very ideal for my financial ability and business philosophy.
I am intending to set up my Anytime Fitness branch in:
I will include the following important information for evaluation:
(Location map, landmark, and actual site)
(Terms of lease and rental rate)
(Contact person for further assistance about the site)
I would be pleased to meet with you at your convenient time to discuss matters personally.
Thank you very much,
Signature over printed name
When putting together your franchising letter of intent, you should assemble the entire scope of the business down to the specifics such as the consulting, liabilities, stocks, payments, inventory, etc. Ensure that these details are as compact as possible and very well reviewed not only by the franchisor but by an experienced lawyer to guarantee that everything has been taken into account and nothing is left out.