Once you’ve set your objectives for buying a business, done your initial research and identified what looks like a good acquisition target, it’s time to let the seller know that you’re officially interested. This makes it possible to deepen your research and move the project forward. The tool you use at this point is a letter of intent — which is often referred to as an LOI.
What is a letter of intent?
A letter of intent is a letter from you to the seller of the business that lets them know that you are seriously considering submitting a formal bid to purchase the business, and that lays out the proposed transaction details at a high level. Although it is not a legally binding agreement to purchase, it may include elements that create binding obligations between the potential buyer and seller, including:
- Confidentiality agreement. This lets the seller know that they can safely disclose key information about the business to you, such as their financial records, client lists, and intellectual property, and that you will keep it confidential. This allows you to examine the business much more closely and puts the seller’s mind at ease.
- Exclusivity period. This sets out a period of time during which the seller agrees not to entertain offers from any other buyers without speaking to you first. This gives you the time you need to do your due diligence and protects your option to buy if you so choose. There may be financial penalties for the seller if they sell the business to someone else without consulting you during the exclusivity period.
Why is a letter of intent for business important?
A letter of intent, or LOI, is important for a business because it signals the beginning of due diligence and negotiations that are necessary to complete a business acquisition. It does not have to be a lengthy document and there is generally no standard format for an LOI. When it comes time to draft one, you will likely want the assistance of a lawyer who is experienced with such matters in order to ensure that it covers the right bases. It can protect you from exposure to any unintended consequences, especially if the deal doesn’t work out.
When to use a letter of intent
A letter of intent typically comes in after you’ve had your initial conversations with the seller of the business and done enough homework that you now intend to purchase the business, barring any negative surprises. The letter of intent lets the seller know that you are serious and acts as the opening salvo in a process that will involve further research and negotiation around price and other factors.
How to write a letter of intent for business
Remember your objectives when you write an LOI. Stick to the big idea and don’t try to be too precise or get bogged down in details. In fact, adding certain details like specific dates and dollar amounts can be risky, as they could make the document legally binding.
It’s often advised to hire a lawyer to write an LOI, but if you decide to do it yourself, you can follow this format:
- Introduction. State the purpose of the document, your name, the seller’s name and describe the transaction — who intends to buy what from who.
- Potential transaction. Here you can be more specific about an approximate price or price range that you are proposing, as well as rough timelines for the next steps.
- Contingencies. This is where you can spell out the conditions that will be necessary to make a deal. For example, you might need to be fully satisfied by the due diligence process or be successful in securing funding.
- Due diligence. Here you can go into detail about some of your due diligence expectations, such as the types of financial, customer, employee and other data that you will need to review as part of your decision-making process.
- Covenants and binding agreements. This is where you can add legally binding aspects to the LOI, such as a nondisclosure agreement or a non-compete agreement. These ensure that the buyer may not use the seller’s information to start a competing business.
- Non-binding agreement. Just to be super clear and avoid any misunderstanding, the LOI should specifically state that the agreement is non binding. It is not a firm offer to purchase the business.
- Closing date. This sets out a time limit for the due diligence and negotiation process. If the deal has not been closed by this date, the LOI expires, and both parties can move on.
Key considerations for writing a letter of intent for business
A few helpful guidelines:
- Be accurate. An LOI sets the tone for the negotiation with the seller, it might be required to secure your funding, and although it may not be legally binding, the seller always has the right to take it to court if something goes wrong. Take time to double-check all the names, dates, and amounts.
- Keep it simple. There’s no need to say more than what’s required to get to the next step. The more details or complex language you add, the more likely there will be a misunderstanding. Keep it short and sweet.
- Consider a lawyer. If the transaction is very straightforward or for a relatively minor amount, feel free to draft your own LOI. But if there is a hint of doubt or you prefer to err on the side of caution, a lawyer with experience in LOIs can be invaluable.
Example letter of intent
To assist you in drafting your LOI, here’s a template that outlines the general points you may want to include in your letter. As an LOI is often written by the buyer, we provide such a template:
“[Your name and position, your company name, your address]
Dear [Seller’s name],
This letter of intent concerns the interests of the following parties:
Buyer: [Your name]
Seller: [Seller’s name]
In which Buyer would purchase the business assets set forth in this letter from Seller. Following are terms, conditions and steps to move towards an agreement.
- Potential transaction
The potential transaction would involve payment of [amount] from [Buyer] to [Seller] in exchange for [the specific business assets].
Before the parties can reach a final agreement, [Buyer] must conduct due diligence and be satisfied with all information and documents that [Seller] provides.
- Due diligence
[Buyer] asks permission to examine the financial, accounting and business records, contracts and other legal documents of [Seller] until the closing, or termination, of this Letter of Intent.
- Confidentiality agreement
All information that [Buyer] and [Seller] share will remain strictly confidential between the parties and their legal representation.
All parties agree to carry their own expenses, including any legal or professional fees that may result from due diligence proceedings or any other matter associated with the intended transaction.
- Nonbinding agreement
Except for the section entitled “Confidentiality agreement,” this Letter of Intent is nonbinding for both parties.
- Closing date
The closing of the transaction should occur no later than [date]. In the event of the parties not concluding the transaction, the “Confidentiality Agreement” clause still stands, as does any other Confidentiality Agreement that may be in place.
Agreed to by Buyer
[Buyer signature and date]
Accepted and Agreed by Seller(s)
[Seller signature and date]”