A letter of intent (LOI) to purchase a business is not a legal contract. It is simply a non-binding agreement to enter into negotiations to buy a business. It usually clearly lays out any tentative agreements that were made orally by the buyer and seller of the business.
It will be used as a reference point when the parties begin negotiations, and any previous agreements may be modified or canceled before finalizing the deal. It gives the prioritized points that have been generally agreed upon, so the secondary details can be negotiated.
Some, but not all, of the items that are usually included in a letter of intent to buy a business are:
• Price and method of payment
• Timeline for due diligence of buyer
• Any escrow if required
• Length of time the buyer has exclusivity for purchasing the business
• Access to financial and other records
• Consideration for employees
• Confidentiality obligations of the seller
There are long-form and short-form LOIs . The advantages of a long-form letter is to state any deal-breakers and get them resolved in the beginning, so neither party needs to get involved with legal fees later.
If important issues surface during the preliminary discussions that are insurmountable, it is better to know before the serious negotiations start, and the buyer has exclusivity. However, long-form letters may also slow the process.
Long Form Or Short Form
Whether it is long or short-form, the letter should clearly state the full names of the buyer and the seller in the first paragraph. The proposed purchase price should also be in the beginning of the letter. The method of payment may also be mentioned such as a single payment, stock options or installments.
The names of the two parties will not change, but the purchase price could change for several reasons including:
• Loss of a key customer
• Changes in the general economic conditions
• Inconsistencies found by the buyer in financial documents that were not mentioned by the seller
Next, the letter should state the buyer’s terms and conditions for making the purchase. This may include the review of:
• Financial statements
• Tax returns
• Vendor relationships
According to the information above, the process will move forward to a final agreement. If the buyer is not ready to make the purchase, or the seller wants new conditions, a new LOI can be written to reflect any modifications required for a new agreement.
This could be done by either the buyer or seller. Even though the letter is not legally binding, one exception may be an agreement to confidentiality during the time the buyer is reviewing the financial and tax statements.
Finally, the letter should include a date on which the deal will be closed. This date should give the buyer time to examine all the documents and determine if they are accurate. This date could be changed by either the buyer or seller if both parties agree on the new date.
The buyer may give a deposit to the seller to secure exclusivity for buying the business. However, the buyer should not give a non-refundable deposit. It should only be paid when the contract is signed, and then only given to the seller’s lawyer to be put in an escrow account.
Below is a sample letter of intent to buy a business. It should be written as a formal business-style letter and sent by certified mail, so the buyer is certain it was received. Since it is not a binding document, only the buyer needs to sign the letter.
Sample letter of intent to buy a business
Name of Buyer
Address of Buyer
City, State, Zip Code
Name of Seller
Name of Business Being Sold
Address of Business
City, State, Zip Code
Dear Name of Seller:
This is a Letter of Intent for Name of Buyer to purchase Name of Business from Name of Seller for AMOUNT. After a deposit of AMOUNT is given, the remainder of the purchase price will be paid in installments of AMOUNT paid of the first of each month for 12 months starting DATE with the last payment on DATE.
I would acquire Name of Business including its offices and warehouse with inventory and equipment at ADDRESS, its brand identity and logo as well as customer lists. I require at least 60 days to examine the financial statements and tax returns as well as the customer lists before finalizing the purchase and giving the deposit.
I also require that you agree to confidentiality about my intent to purchase your business until the purchase agreement is complete and we can make a joint statement.
As this letter is not the official purchase agreement, the terms and condition stated here may change during negotiations. Once it is decided that I will purchase the business, I anticipate that the closing will take no more than 30 days.
Signature of Buyer
Printed Name of Buyer