When you find a business you'd like to purchase, your attorney will draft a letter of intent (LOI) to indicate your interest. This document is usually non-binding, meaning its terms can be renegotiated before the business transfer takes place. However, it'll provide you and the seller some assurance that each party wants to act in good faith to complete the transaction.
What does a letter of intent do?
A letter of intent grants you the exclusive right to review the business and consider it for purchase. During this time, you can look into the business’s inner workings and proceed through the rest of the transfer process, even if other interested buyers later show interest.
The period of exclusivity is important. It can protect you from sinking resources into studying the business, only to find that the seller has moved forward with another party.
Sellers benefit from LOIs, too. The document can assure a seller that you're interested in the business and motivated to complete the transaction.
What should my LOI include?
Most LOIs contain the following sections:
- An introduction explaining the purpose of the document, its effective date, and a definition of some of the terms that are used in the document
- Identification of both the parties and the stock or assets involved in the proposed transaction
- A description of the transaction, the purchase price, and the assumptions you made in arriving at the purchase price
- A description of how the buyer will finance the purchase
- The contingencies the buyer and seller must complete before reaching a final agreement
- A list of any relevant sub-agreements, which might include a non-compete agreement, a nondisclosure agreement (NDA), and a non-solicitation agreement for employees and customers, and covenants, including one that grants the buyer exclusivity in evaluating the business for purchase
- A statement that grants the buyer access to the business’s employees, books, and records for due diligence
- Clarification of who is responsible for the costs and expenses involved in the process
- A statement that explains that the letter is non-binding and that the sub-agreements and covenants are binding
- An end date by which the buyer and seller must come to an agreement before abandoning the deal
- The governing law or venue that directs the legality of the agreements that take place
- A signature block for both the buyer and the seller, which will need to be notarized
What happens after it’s signed?
After the LOI is signed, both the buyer and seller will enter a period of due diligence. Here, both will want to look into one another’s backgrounds to gain peace of mind about the transaction:
|The buyer will want to ensure that there are no red flags in the financial, operational, and reputational parts of the business.|
|The seller will want to determine whether the buyer has the experience and financial capacity or connections that are necessary to take on the business.|
Provided that the document was drafted to be a non-binding agreement, either party can walk away from the sale based on information they discover or because they’ve failed to come to an agreement in renegotiations of the deal.
Can I change the terms later?
LOIs create a duty for both parties to negotiate in good faith, but the terms they lay out can make later negotiations much more difficult. This is especially true when an LOI is based on a preliminary agreement between a buyer and a seller.
Buyers or sellers who want to renegotiate an offer will need to provide compelling reasons to do so. But, it’s important to recognize that the other party may hold firm. Most are less than willing to restart negotiations that will result in a less favorable transaction for them.
Can I create a letter of intent to purchase a business without an attorney?
It’s best practice to have LOI documents prepared by an attorney. Here's why: An attorney can ensure that any preliminary offer you propose is non-binding.
Still, there is an advantage to using an online LOI template, such as this one from LawDepot. By working through your LOI yourself, you can submit your letter to the seller quickly. And, if accepted, you can lock in your period of exclusivity before other interested buyers inquire about the business.
Would you prefer to connect with an attorney? Many business buyers highly recommend Contracts Counsel.
After providing the seller with your LOI and coming to a preliminary agreement, you'll gain exclusive rights to review the business’s books, practices, and inner workings. This period of due diligence is one of the most important parts of the entire acquisition process. It may take you several weeks or months to complete. You can learn more about the due diligence process here:
Log into your owner’s portal for more free articles and advice that’ll help you make your acquisition a success.