Key Takeaways

  • An intent to purchase agreement (or letter of intent) is a preliminary, often non-binding document outlining the terms of a potential business acquisition.
  • It establishes expectations, defines negotiation parameters, and helps prevent misunderstandings as both parties move toward a definitive purchase agreement.
  • While most terms are non-binding, clauses such as exclusivity, confidentiality, expenses, and non-solicitation may be legally enforceable.
  • Detailed letters of intent (LOIs) can resolve major issues early, streamline due diligence, and protect both buyer and seller interests.
  • Including key elements—like deal structure, purchase price, due diligence scope, conditions precedent, and closing timeline—ensures clarity and strengthens negotiation positions.
  • Understanding the differences between short- and long-form LOIs, and when to use each, can significantly impact the efficiency and outcome of the transaction.

An intent to purchase business agreement is the first step to securing a new business and make your plans formally known. Buying a business or creating a joint venture can be a long process that requires many steps and paperwork. The letter of intent is one of the most important parts of the journey because it sets the guidelines and expectations for the entire process.

Letter of Intent for Business

A letter of intent for business can also be called a memo of agreement or memo of understanding. It sets out the process for buying an existing company and finalizing the deal. Either party can walk away at any point during the sales process, but the letter of intent is an agreement to move towards the completion of the deal.

An intent to purchase business agreement isn't legally binding and is simply a notice to begin negotiations to purchase a business. It is a way to put into writing the tentative agreement that was most likely made verbally between the two parties.

When negotiations begin, the letter of intent can be the starting point for discussions, and both parties can refer back to it to remember the original scope of the deal. If a letter of intent is detailed and well-written, it can facilitate negotiations so that they run more smoothly and also help to avoid any potential misunderstandings down the road. It starts both parties on the same page by outlining their goals for the deal and any assumptions they have.

The letter of intent is typically signed at the beginning of the process to buy or sell a business, usually as soon as both parties agree that they want to move forward with the deal and are ready to discuss it in more detail.

Key Elements of an Intent to Purchase Agreement

A well-drafted intent to purchase agreement sets the foundation for the final business purchase contract. Although primarily non-binding, it provides a roadmap for the transaction and builds trust between the buyer and seller. Essential components often include:

  • Parties Involved: Full legal names and business details of the buyer and seller.
  • Purchase Price and Structure: The proposed amount, payment structure (cash, stock, earnout), and whether the transaction is an asset or stock purchase.
  • Assets and Liabilities: What is included in the deal (e.g., intellectual property, equipment, contracts) and how liabilities will be handled.
  • Due Diligence Scope: The buyer’s right to examine financial records, contracts, and other key business information before closing.
  • Conditions Precedent: Specific events that must occur before closing, such as regulatory approvals, financing, or third-party consents.
  • Closing Timeline: Target dates for due diligence completion, definitive agreement signing, and transaction closing.
  • Transition and Post-Closing Terms: Plans for management transition, employee retention, or ongoing support after the sale.

Including these details helps ensure that both parties share a clear understanding of the transaction’s framework and minimizes the risk of disputes later.

Purpose of a Letter of Intent

The letter of intent or intent to purchase business agreement is important for both parties. For the buyer, the letter of intent details the information they need from the seller to make an informed decision of if they want to actually buy the business.

The letter allows the buyer “right of first refusal.” This is added protection for the buyer because the seller agrees to put the buyer first in line to buy the business, even if other potential buyers may come forward later. Without the right of first refusal, the buyer runs the risk of investing time and money to find out if they are really interested in purchasing the business, only to have the seller make the final deal with someone else.

For the seller, the letter of intent shows that the buyer is at least somewhat serious about purchasing the company. With a letter of intent, the seller can get more information about the buyer's finances and business experience to know if they are a good fit to purchase the company.

Binding vs. Non-Binding Clauses

Although the intent to purchase agreement is typically non-binding overall, certain provisions often are legally enforceable. These binding terms are critical to protecting the parties’ interests during negotiations. Common binding clauses include:

  • Exclusivity (No-Shop Clause): Prevents the seller from negotiating with other potential buyers for a set period.
  • Confidentiality: Ensures that sensitive financial and business information shared during negotiations remains private.
  • Expense Allocation: Specifies which party covers costs like legal fees, due diligence expenses, or regulatory filings.
  • Non-Solicitation: Restricts either party from recruiting the other’s employees or clients during negotiations.

Clearly marking which sections are binding and which are not is essential to avoid misunderstandings and potential legal disputes later.

Non-Binding Letter of Intent

A letter of intent doesn't bind either party to the sale of the business. It simply states that both sides are interested in moving forward. If the letter were a legally binding contract, both parties would have to honor the terms or risk being taken to court if they didn't keep their side of the promise. Because the letter isn't legally binding, either party can cancel the letter if they no longer want to pursue the sale. The process for canceling the letter is outlined in the letter of intent itself.

However, some of the terms of the letter can be legally binding. If the seller grants the right of first refusal to the buyer and then ends up selling the company to someone else, the buyer is able to take the seller to court for not following through on the agreement.

Role of Due Diligence and Risk Management

One of the primary functions of an intent to purchase agreement is to facilitate due diligence—the in-depth review process that determines whether the buyer should proceed with the acquisition. This typically involves evaluating:

  • Financial statements, tax records, and debt obligations.
  • Contracts with suppliers, customers, and employees.
  • Legal and regulatory compliance issues.
  • Intellectual property ownership and pending litigation.

The LOI’s due diligence provisions ensure the buyer has access to the information needed to make an informed decision. For the seller, it provides a structured timeline and process for disclosure, helping manage risk and reduce post-sale liabilities.

Long and Short Letters of Intent

Letters of intent can either be long-form or short-form. A long letter of intent can be helpful for a number of reasons, including:

  • Issues can be resolved early in the negotiation process, which helps avoid wasting time and money on legal proceedings later.
  • Getting significant issues settled early on helps the rest of the process run more smoothly and efficiently.
  • If large issues arise for either party, they can cancel the deal before they have invested too much time and resources on it.

Choosing the Right Format for Your Deal

Whether to use a short- or long-form intent to purchase agreement depends on the complexity of the transaction and the level of detail both parties require early in negotiations:

  • Short-Form LOI: Typically used for smaller or less complex transactions. It includes only the core terms—such as purchase price, asset scope, and timeline—allowing the parties to move quickly into formal negotiations.
  • Long-Form LOI: Appropriate for larger, high-value, or more complex deals. It provides comprehensive detail on conditions precedent, representations and warranties, post-closing obligations, and more.

Choosing the right format ensures negotiations progress efficiently while still protecting both parties’ interests.

Frequently Asked Questions

  1. Is an intent to purchase agreement legally binding?
    Generally, no. Most terms are non-binding, but specific clauses—like exclusivity, confidentiality, and expense allocation—can be legally enforceable.
  2. What happens after signing an intent to purchase agreement?
    The parties enter the due diligence phase, negotiate the definitive purchase agreement, and work toward satisfying conditions precedent before closing.
  3. Can I back out after signing an intent to purchase agreement?
    Yes, unless you violate binding clauses. The agreement usually allows either party to withdraw before signing the final contract.
  4. Should I include a purchase price in the LOI?
    Yes. Including a proposed price and payment structure sets expectations and provides a baseline for negotiations.
  5. Do I need an attorney to draft an intent to purchase agreement?
    While not required, legal guidance is strongly recommended to ensure clarity, protect your interests, and avoid unintended legal consequences.

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