Letter of Intent to Buy a Restaurant

A letter of intent to buy a restaurant can be helpful to ensure that the agreement goes through. With that said, letters of intent could be a bit confusing to the average person. The general question that arises in this context is whether or not a letter of intent is an actual contract. Is it a legally binding document? When should it be used?

A letter of intent, also referred to as a memorandum of understanding, term sheet, LOI, or pre-contract, can be valuable and save both time and money for all parties involved. The actual letter of intent will identify the basic terms of a particular transaction. With regard to the purchase of a restaurant, it will include the purchase price, payment terms, the intent of both parties, when the transaction will take place, etc. In fact, it can be detailed or short in terms of its length. For example, it can simply be a written statement indicating that “I, John Smith, will purchase your restaurant if you represent that it is in good financial standing.”

Binding vs. Non-Binding Letters of Intent

A letter of intent can be binding, non-binding, or binding in some ways but not others. It can only be binding, though, if the parties exchange consideration. This might be a mere promise to act under the terms of the agreement or an exchange of something of monetary value.

Therefore, since consideration can be very easily met, it is important that the parties who don’t want the LOI to be binding expressly indicate in it that the letter is not binding on the parties. However, some parties wish the LOI to be an actual legally binding agreement. If that is the case, then they can establish an enforceable contract by establishing the offer, acceptance, consideration, mutual assent, and legal capacity.

If the parties want only certain terms in the LOI to be legally binding, but not others, then they should expressly indicate this in the letter. This can be done by simply including language such as “Some, but not all, of the terms identified in this letter of intent will be binding. Such binding language will include …”

If the parties only want some of the terms to be binding, they generally ask that the following terms be binding:

  • Payment terms, e.g. payment method, amount, etc.
  • Timeline for due diligence
  • Escrow payments, if applicable
  • Exclusivity provisions, if applicable
  • Access to financial records
  • Employee considerations
  • Confidentiality

Long Form vs. Short Form Letters of Intent

There are two LOI forms – the long and short form. There are advantages to the long form, including the fact that it will identify certain occurrences that will terminate the letter of intent. Furthermore, it will include issues from the outset; if the other party doesn’t fix such deficiencies, then the LOI will be deemed invalid. With the advantages comes a disadvantage in that the long form LOI takes longer to draft, thus causing the process to become longer.

What to Include in the Agreement

The LOI will identify what is being agreed upon by the parties. During this time, the parties might enter a negotiation phase before signing the letter of intent to ensure that they both understand their rights and responsibilities, similar to that of a contract. The LOI can also be a good benchmark for future contracts between the parties. But since the LOI is usually a non-binding letter, the parties can cancel or revoke their intent at any time without due notice or issues of breach.

Naming the Parties and Price

The LOI will begin by stating the parties involved. Usually, this will involve a seller and buyer. In this case, we will include the restaurant seller and restaurant buyer, as well as the purchase price. The parties will remain the same throughout the negotiation phase, but the purchase price might be altered depending on the ongoing negotiations between the parties. Such a change can be done for several reasons, including economic conditions, inability to come to an agreement, or outstanding debts of the restaurant wherein the seller will charge a reduced purchase price to the potential buyer.

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