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Valuation > Letter of Intent - Pg. 73

Financing a Game Development Venture 73 you can project your profits for the next 5 to 10 years, you can apply a discount factor (a financial formula based on the interest rate and time period) to each year's profit, tally them up, add the discounted value of the sales price at the end of the five or ten years and you get the value of the machine today. Example: Assume: Interest rate = 10% Year 1 Expected Profit Present Value $10 $9.09 Year 2 $10 $8.26 Year 3 $10 $7.51 Year 4 $10 $6.83 Year 5 $10 $6.20 Sale Price @ end of Year 5 $100 $62.09 $99.98 Total Present Value Letter of Intent Before settling into the meat of the letter of intent ("LOI"), decide on a time frame. How long do you want the purchaser to have an exclusive option to buy the company? What is your target sale date? Be careful that all of your commitments to the purchaser have deadlines, or the due diligence/closing process can drag on for months and then collapse. Furthermore, how binding do you want your LOI to be? Do you want an agreement that, barring any unforeseen issues coming up in due diligence, the purchaser is obligated to complete the purchase? If so, the LOI needs to be renamed "Binding Short Form Purchase Agreement." The letter of intent should cover the headline issues such as: · What are they buying? The purchase can be structured as a sale of the assets or as a sale of the stock. In an asset sale, the purchaser usually buys all of the target's assets except cash,