Introduction

A letter of intent (LOI) to purchase a business is like a handshake before the formal contract. It's a preliminary document that outlines the basic terms and conditions under which one party (the buyer) intends to buy a business from another party (the seller). Think of it as a way to get both sides on the same page before they dive into the nitty-gritty details of the final agreement.

An LOI isn’t legally binding—at least not entirely—but it does set the stage for negotiations and lays out the framework for what both parties expect moving forward. Let's explore what a letter of intent to purchase a business involves, why it’s important, and what you should include if you're drafting one.

Read: What is a cease and desist?

The basics of a letter of intent

A letter of intent to purchase a business usually includes key terms and conditions that will form the foundation of the final agreement. While not a full-blown contract, it shows that both parties are serious about the deal and ready to negotiate in good faith.

Here’s what a typical LOI might cover:

• Purchase price: The proposed price or a price range for buying the business.

• Payment terms: How the buyer will pay—cash, stock, financing, or a mix.

• Due diligence: A period where the buyer will investigate the business’s finances, operations, and legal status.

• Key conditions: Any conditions that must be met for the sale to go through, like securing financing or obtaining regulatory approvals.

• Exclusivity: A period during which the seller agrees not to negotiate with other potential buyers.

• Confidentiality: An agreement to keep all information exchanged during the negotiation process private.

• Timeline: The expected timeline for the transaction, including deadlines for due diligence and closing the deal.

How does a letter of intent work?

Here’s how the process typically works:

1. Initial draft: One party, usually the buyer, drafts the LOI to outline the key terms of the proposed purchase.

2. Negotiation: The LOI is presented to the seller, who can accept the terms, reject them, or propose changes. This back-and-forth negotiation is crucial for both sides to agree on the main points.

3. Sign and execute: Once both parties agree on the terms, they sign the LOI. While not binding in most cases, it signals that both parties are ready to move forward.

4. Due diligence: With the LOI in place, the buyer usually begins the due diligence process, diving deeper into the business’s books, legal issues, and operations.

5. Final agreement: After due diligence and any final negotiations, both parties move on to draft and sign the final purchase agreement, which is legally binding.

Read: What is a material breach of contract?

Key elements of a letter of intent

If you’re drafting an LOI, here are some key elements you should include:

• Basic terms: Start with the essential terms—like the purchase price, payment method, and timeline for the transaction.

• Due diligence requirements: Clearly outline what information the buyer needs to review and any specific documents or disclosures required from the seller.

• Conditions to close: List any conditions that need to be met before the deal can be finalized, such as financing approval or regulatory consent.

• Exclusivity period: Include a clause that gives the buyer exclusive rights to negotiate the deal for a set period.

• Confidentiality agreement: Protect sensitive information exchanged during the negotiations with a confidentiality clause.

Pros and cons of a letter of intent

Pros:

• Sets clear expectations: A letter of intent to purchase a business helps both parties understand the basic terms of the deal early on, reducing the risk of misunderstandings.

• Facilitates due diligence: A letter of intent to purchase a business provides a clear roadmap for what needs to be reviewed and disclosed, making the due diligence process more efficient.

• Reduces transaction time: A letter of intent to purchase a business speeds up the overall negotiation process by focusing discussions on the key points.

Cons:

• Not legally binding: Because most LOIs are non-binding, one party could back out or change terms, which could lead to frustration or wasted time.

• Potential for disputes: If the LOI is too vague or not well-drafted, it could create more confusion than clarity.

• Over-reliance: Some parties might rely too heavily on the LOI and neglect to negotiate finer details that will need to be ironed out later.

Read: Storage of legal documents: Best practices

What to do if you receive a letter of intent

If you’re on the receiving end of an LOI, here’s what you should do:

• Review carefully: Go through the terms with a fine-tooth comb to understand what’s being offered and what’s expected from you.

• Seek legal advice: Get a lawyer to review the LOI to ensure it’s fair and that you’re not agreeing to anything that could put you at a disadvantage.

• Negotiate: If there are any terms you’re not comfortable with, don’t hesitate to negotiate. This is your chance to shape the deal in a way that works best for you.

• Clarify intent: Make sure you understand which parts of the LOI are binding and which are not. This will help you know where you stand legally if things don’t go as planned.

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 you’re 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 LOI as your roadmap—clear, focused, and ready to guide you through to the final deal.

How Cobrief can help with contract review

Reading your business contracts can feel overwhelming as an owner-manager of a small to medium-sized business. That’s where Cobrief comes in. Cobrief helps business owners and operators review their business-to-business contracts for legal risks.

Upload your contract to Cobrief's AI contract review software, click review and you’ll get a list of all the risks, in plain English. This helps you decide whether to sign, negotiate or reject the terms of your contract, or hire a lawyer. Think of it as a heat map for your contracts.

Get started here.