Finance, Industry Insights

Letter of Intent to Buy a Business: Protect Your Transaction

Two people sit at a desk with one of them signing a letter representing the letter of intent to buy a business.

Entering into a letter of intent to buy a business is typically the first formal step in the process of buying or selling a company. Understanding a letter of intent, how it works, and what it includes is especially important if you are a first-time buyer or seller. This post will discuss several aspects of a letter of intent to buy a business, including why an LOI is helpful, key components of a letter of intent, and a few common pitfalls. 

What Is a Letter of Intent?

A letter of intent to buy a business (“LOI”) is a legal document that buyers and sellers commonly voluntarily execute when they reach an agreement to purchase/sell a company.  An executed letter of intent to purchase a business does not mean the transaction has “closed” but rather that the transaction process is “starting” and heading toward a closing.   

In other words, the LOI serves as the bridge between a handshake-level interest and a definitive purchase agreement. For many first-time sellers, this is the moment when casual conversations turn into a formal process.  

Why Is a Letter of Intent to Buy a Business Helpful?

A well-crafted LOI is a roadmap for all participants to get from “let’s do this” to a closing.  The due diligence process and legal documentation can be stressful, especially for participants who are unfamiliar with them.  The letter of intent helps outline the diligence process, key legal terms, transaction details, and other important components to ensure that all parties are on the same page and to minimize surprises.   

A letter of intent to purchase a business does not need to be a 15-page mini purchase agreement, but at the same time, the LOI is unlikely clearly define the transaction if it is only a page or two and is silent on important topics.  An appropriately drafted letter of intent is typically around four or five pages. 

Think of it as a roadmap: the clearer and more specific it is, the easier the journey will be for both buyer and seller. 

What Are the Key Components of a Letter of Intent to Buy a Business?

Confidentiality

Business owners are often very concerned about confidentiality and the reaction of customers and employees. LOIs usually reference that the terms of the transaction and the discussions themselves are confidential. There is also usually a several–year tail on the confidentiality period.

Exclusivity

Buyers will have to expend significant resources on conducting due diligence, preparing legal documents, and so on. As such, buyers commonly require exclusivity to invest this time, effort, and money in a transaction.   Exclusivity typically means that the seller, once they have signed a letter of intent to sell their business, will not entertain offers or speak to other potential suitors while the existing letter of intent is in place.  Exclusivity typically lasts between 90 and 120 days. 

Timeline

The LOI typically includes a schedule outlining the timeline between the execution of the LOI and closing, as well as a timetable for achieving major milestones or hurdles, such as securing debt financing. 

Transaction Terms

The LOI contains all key transaction details and financial terms, including but not limited to: 

  • Valuation and Structure
  • Asset vs. Stock Purchase
  • Real Estate
  • Key Employee Agreements
  • Non-Compete Terms
  • Escrow
  • Any Excluded Assets
  • Etc.

The letter of intent might also address other topics, such as representations and warranties, indemnification limits, and the indemnification period. While these topics will be negotiated and finalized in the actual asset purchase agreement or stock purchase agreement, it is helpful to have some consensus on major deal points in the letter of intent. This is so that the legal documentation process goes more smoothly. 

Binding Vs. Non-Binding Letters of Intent to Purchase a Business

Most LOIs to purchase a business have some provisions that are binding and others that are not. For example, exclusivity and confidentiality are typically binding, meaning that both parties are obligated to fulfill these commitments. Other provisions – such as the target closing date – are usually non-binding. 

Fees and Expenses

Most LOIs include a discussion of which parties are responsible for paying transaction fees and expenses. This is particularly relevant in cases where a transaction fails to close for any reason. It is most common for buyers and sellers to each pay their own expenses; however, there are situations where certain parties may agree to cover specific aspects of the deal costs. For example, perhaps the buyer will pay the investment banking fees earned at closing. 

Who Signs a Letter of Intent to Purchase a Business?

Both the buyer and the seller, as legal entities, execute the letter of intent to purchase a business. In many cases, especially with smaller private companies, the shareholders of the selling business may also sign as individuals. This is because they may agree to specific key provisions – such as a non-compete agreement – on an individual, personal basis. 

What Are Common Pitfalls in a Letter of Intent?

Open-Ended Exclusivity

A LOI must have a termination date that expires at whichever comes earlier: (a) the transaction closing, or (b) a specified date.  Failure to include a termination provision can result in a seller being locked in indefinitely. 

Vague Key Terms

Key transaction details, such as valuation, the amortization schedule on a seller’s note, or how the earnout is defined and calculated, need to be clearly described and defined in the letter of intent.  A letter of intent to buy a business that includes a provision stating “final purchase price will be determined at closing” is problematic. 

Summary

A letter of intent to buy a business is a detailed roadmap that ensures all parties are on the same page as they head toward successful due diligence, legal documentation, and closing. It creates structure and trust, while minimizing surprises that could derail a transaction. 

At 1719 Partners, we’ve helped business owners navigate this process many times. Whether you are preparing to sell your company or evaluating a potential acquisition, the right LOI sets the tone for the deal. 

Thinking About Buying or Selling a Business?

A well-written letter of intent protects your interests and drives your transaction toward a successful close. At 1719 Partners, we have ample experience structuring letters of intent— if you have questions or would like advice on yours, feel free to contact us.

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