Introduction

A letter of intent (LOI) to purchase a business is like a friendly handshake before the formal contract gets signed. Itʼs an initial document that outlines the basic terms and conditions under which the buyer plans to buy the business from the seller. Think of it as a way to ensure both sides agree on the main points before digging into the finer details of the final contract.

While a letter of intent to purchase a business isnʼt fully legally binding, it does does lay the groundwork for negotiations and sets clear expectations for both parties moving forward.

Letʼs dive into what a letter of intent to purchase a business includes, why it matters, and what key elements it should include.

Read: How to update your contracts to increase profits

The basics of a letter of intent

A letter of intent to purchase a business typically includes the key terms that will will form the foundation of the final share purchase agreement (SPA), which is the main document used to purchase a business.

Hereʼs a breakdown of what a typical LOI might cover.

Purchase price

This section lays out the proposed price or a price range for the business. Itʼs the

“show me the moneyˮ moment, providing clarity on what the buyer is willing to offer and helping to avoid any awkward misunderstandings later on. No one wants to find out theyʼre at a $1 million dollar negotiation when they thought they were at $100,000.

Payment terms

The letter of intent to purchase a business details how the buyer wants to pay for the business—whether through cash, stock options, financing, or a combination of these methods. Understanding the payment structure upfront can streamline negotiations and set realistic expectations.

Due diligence

This section outlines the timeframe during which the buyer will dig into the businessʼs finances, operations, and legal standing. Due diligence is crucial for uncovering any hidden skeletons, like outstanding debts or legal disputes that could haunt the buyer after the sale.

Key conditions

Here, youʼll find any specific conditions that must be met for the sale to go through. This could include securing financing or getting necessary regulatory approvals. Clearly outlining these conditions helps both parties understand their responsibilities.

Exclusivity

Often, the letter of intent includes an exclusivity clause that gives the buyer a set period during which the seller agrees not to entertain offers from other potential buyers. This allows the buyer to conduct due diligence without the stress of competing offers—like having the dance floor all to yourself before the party gets crazy.

Confidentiality

This clause ensures that all information exchanged during negotiations stays under wraps. It protects sensitive business information and trade secrets, so both parties can communicate openly without worrying about leaks.

Timeline

The letter of intent to purchase a business sets out the expected timeline for the transaction, including deadlines for due diligence and finalizing the sale. Having a clear timeline helps both parties stay organized and accountable.

In summary, a letter of intent is a vital document in the purchase of a business, providing a structured framework for further negotiations. It helps align expectations between the buyer and the seller, ensuring both know exactly what theyʼre getting into—no surprises.

Read: How to structure milestone payments in contracts

Why is a letter of intent important?

A letter of intent to purchase a business is like the opening act of a concert—itʼs important for setting the mood before the main event. Hereʼs why it matters in the process of buying a business.

Clarifies expectations

Think of the letter of intent as the “weʼre on the same pageˮ moment. It gets both parties aligned from the get-go, reducing the chances of misunderstandings or surprises later on. Nobody wants to find out at closing that the seller thought they were selling a bakery, while the buyer thought they were buying a bike shop.

Provides a roadmap

The letter of intent lays out the basic terms of the deal, serving as a handy guide for both parties. It highlights key elements like purchase price and payment terms, making it easier to draft the final agreement. Itʼs like a GPS for negotiations—it helps direct what goes into the final share purchase agreement (SPA).

Establishes good faith

While itʼs not a legally binding contract, an LOI signals that both sides are serious about the deal and ready to negotiate in good faith. Itʼs a bit like saying, “Hey, I actually want to make this happen.ˮ

Speeds up the process

By agreeing on the main terms upfront, the LOI can help fast-track the entire transaction. With a clear framework, both parties know what to expect, which means less back-and-forth and more action. In the fast-paced world of business, every minute counts.

Read: How are contracts usually signed?

How does a letter of intent work?

So, youʼre ready to make a business deal, and the letter of intent is your trusty tool. Hereʼs how the process typically unfolds.

Initial draft

It all starts with one party, usually the buyer, drafting the letter of intent.

Negotiation

Once the letter of intent to purchase a business is ready, it gets handed over to the seller. This is where the fun begins. The seller can accept the terms, reject them, or suggest some tweaks. This back and forth negotiation is like a dance—each side has to step in sync to agree on the main points without stepping on any toes.

Sign and execute

After both parties come to an agreement, they sign the letter of intent. While this may sound odd as itʼs not usually legally binding, itʼs similar to shaking hands at the end of a successful negotiation: it shows everyone is ready to move forward.

Due diligence

With the letter of intent in place, the buyer dives into due diligence. This is the serious detective work—examining the businessʼs finances, legal issues, and operations. Itʼs like a thorough background check before a first date, ensuring there are no hidden surprises.

Final agreement

After the due diligence phase and any final negotiations, itʼs time to draft and sign the final purchase agreement. This document is legally binding, so itʼs the real deal —the moment when all the groundwork pays off and both parties are officially committed.

Read: 7 common contract mistakes that could cost your business thousands

Whatʼs the difference between a letter of intent to purchase a business and a share purchase agreement (SPA)?

While both documents play important roles in purchasing a business, they serve very different aims. Hereʼs a quick overview.

Purpose

A letter of intent is a preliminary document that outlines the basic terms of the deal and shows that both parties are serious about negotiating. A share purchase agreement, however, is a formal contract that details the specific terms of the sale, including the price, payment structure, and any representations and warranties. Itʼs the main event where all the nitty-gritty gets hammered out.

Legality

Generally, a letter of intent to purchase a business isnʼt legally binding (though some clauses, like confidentiality, might be). Itʼs more of a roadmap to guide the negotiation process.

A share purchase agreement is legally binding. Once signed, both parties are required to follow through on the terms outlined in the agreement, so you want to be sure you read the fine print before you sign.

Detail

A letter of intent provides a high-level overview of the deal, covering the key points without diving deep into the specifics. Think of it like the teaser trailer for a movie.

An SPA is where the details come to life. In short, itʼs the full script, complete with every plot twist.

Timing

Typically, the letter of intent is drafted first. It kicks off the process and sets the stage for negotiations. Itʼs the starting line. The SPA is drafted later in the process and comes into place once the parties have agreed on the main terms and are ready to finalize the deal.

Read: Why you should always have a contract when doing business

What to do if you receive a letter of intent

If youʼre on the receiving end of a letter of intent to purchase a business, hereʼs what you should do

Review carefully

Take your time to go through the letter of intent in detail. Look for key terms, proposed purchase price, and any conditions. Understanding whatʼs being offered and whatʼs expected of you is crucial.

Seek legal advice

Donʼt skip this step. Having a lawyer review the letter of intent can help ensure that itʼs fair and that youʼre not agreeing to terms that could put you at a disadvantage. They can spot any red flags and give you peace of mind.

Negotiate

If something doesnʼt sit right with you, speak up! This is your opportunity to negotiate terms that work for you. Whether itʼs the purchase price or specific conditions, donʼt be afraid to voice your concerns and suggest changes.

Clarify intent

Itʼs important to understand which parts of the letter of intent are binding and which arenʼt Knowing where you stand legally can help prevent misunderstandings later on. If anything is unclear, ask for clarification before moving forward.

By following these steps, youʼll be better prepared to handle the LOI and steer the conversation in a direction that benefits you.

Read: How to read business contracts like a lawyer

Conclusion

A letter of intent to purchase a business is a great starting point for getting a business deal off the ground. It lays out the basic terms, shows commitment, and sets the tone for the negotiations ahead.

Whether youʼre buying or selling, understanding the ins and outs of a letter of intent can help you navigate the process smoothly and set you up for a successful transaction. So, treat the letter of intent as your roadmap—clear, focused, and ready to guide you through to the final deal.