Key Takeaways

  • A letter of intent (LOI) to purchase a business outlines preliminary terms of a potential sale.
  • While non-binding, some provisions—like confidentiality or exclusivity—can be enforceable.
  • LOIs reduce risk by aligning both parties on major deal terms before drafting a purchase agreement.
  • Buyers typically include details like purchase price, due diligence steps, and financing assumptions.
  • Clearly defining deal structure (asset vs. stock sale) helps avoid misunderstandings later.
  • LOIs benefit both parties by establishing trust and setting negotiation expectations early on.

A non-binding letter of intent to purchase a business conveys the intentions of people involved in a potential business sale agreement. The letter starts the process towards a sale and makes it clear that the party is interested in purchasing the business. The document is also called a memorandum of understanding or a memorandum of agreement.

Because the letter of intent is non-binding and is simply an agreement to start moving towards a finalized sale, either party can walk away at any point without consequences.

When Do You Need a Letter of Intent?

A non-binding letter of intent explains what information the buyer needs in order to make an informed decision about whether or not to purchase the business. One of the main benefits of a letter of intent is that it grants the buyer “right of first refusal”. This means that the buyer is first in line to make the purchase, even if other interested buyers come out later. This is an advantage for the buyer because it prevents them from investing time and money into the sale only to have the seller choose someone else at the last minute.

It also shows the seller that the buyer is serious and allows them to see more details about the buyer's finances and business experience.

The letter of intent is typically written when both parties agree that they want to move forward with the deal and are ready to look at more specific details and information. The letter of intent starts things in motion to move towards a closing date.

Benefits of a Letter of Intent for Both Parties

A letter of intent to purchase business benefits both buyers and sellers in several key ways:

For Buyers:

  • Exclusivity Periods: Buyers can negotiate an exclusivity clause, preventing the seller from entertaining other offers for a set time.
  • Due Diligence Access: LOIs can secure access to financials, operations, customer data, and legal records.
  • Negotiation Clarity: Aligning on fundamental deal terms early reduces the risk of misunderstandings during contract drafting.

For Sellers:

  • Assess Buyer Seriousness: The LOI signals that the buyer is serious and has the resources to complete the purchase.
  • Maintain Confidentiality: Including confidentiality clauses can help ensure sensitive business information stays protected.
  • Streamline the Sale Process: LOIs help identify deal-breakers early, saving time and legal costs down the line.

This document ultimately sets the tone for smoother and more structured negotiations, often making the final deal easier to reach.

Is a Letter of Intent Legally Binding?

Like the name states, a non-binding letter of intent doesn't bind either party to the deal. Either or both parties can cancel the agreement at any time and stop moving forward with the deal. The letter simply states how the deal will be completed.

However, some aspects of the letter could potentially be binding. An example of this is a clause allowing the buyer the right of first refusal, which would allow the buyer to dispute the letter if the seller doesn't follow the agreement and sells the business to someone else.

What Clauses May Be Binding in an LOI?

While a letter of intent to purchase business is generally non-binding, several specific provisions can be legally enforceable:

  • Confidentiality/Non-Disclosure: If one party shares proprietary or sensitive business information, confidentiality clauses are typically binding.
  • Exclusivity or “No Shop” Clause: This limits the seller’s ability to negotiate with other buyers during a defined period.
  • Governing Law and Jurisdiction: Clauses specifying which state law governs the agreement may also be upheld in court.
  • Dispute Resolution Methods: Mediation or arbitration agreements included in the LOI may also carry legal weight.

To avoid confusion, these clauses should be clearly labeled as “binding” or “non-binding” within the letter. Consulting a business attorney when drafting or reviewing the LOI can ensure enforceability is intentional and appropriate.

How to Write a Letter of Intent

A letter of intent is simply an outline of the process both parties will take to move towards a finalized sale. The situation can change as both parties proceed with due diligence and learn more about the financial status of the buyer and the business. Follow these tips to create an effective letter:

  • Keep it short and simple; this isn't the time to go into details
  • Avoid legal jargon
  • Don't get too specific about any part of the purchase process
  • Leave things open in case there are changes before the final sale agreement is finalized

The letter of intent should clearly be identified as such and make it clear that it isn't a binding contract to actually sell the business. In some cases a duty to negotiate in good faith is automatically applied; if not, then it should be included in the letter. This can be especially important in protecting the seller against someone creating the letter simply to collect information about them and their business with no real intention to actually purchase the company.

Both parties should agree and state in the letter if the deal is for stock or assets. Without this agreement, the deal could potentially fall apart if one party thinks they are buying assets and the other party thinks they are selling stock.

Included in the letter of intent could be a purchase price and what that price is based on. It is possible that the price could change as more information is gathered during the due diligence process. Including how the price was originally calculated helps both parties adjust the purchase price fairly.

For a deal involving the sale of assets, the parties should allocate the price of various assets on the balance sheet. How assets are allocated can greatly impact the tax ramifications of the sale. Taxes can make or break a sale, so this information is vital to the deal.

Common Mistakes to Avoid When Drafting an LOI

Even though a letter of intent is not a final agreement, common drafting mistakes can lead to confusion or legal disputes later on. Avoid these pitfalls:

  • Being Too Vague or Too Detailed: Striking the right balance is key. Avoid getting bogged down in legalese or overloading the LOI with contractual detail.
  • Failing to Clarify Binding vs. Non-Binding Terms: Clearly indicate which terms (if any) are meant to be binding.
  • Neglecting Deal Structure Details: Omitting whether it's an asset sale or stock sale can cause major misunderstandings.
  • Overlooking Tax Implications: Purchase structure can affect taxes significantly; these considerations should be outlined early.
  • Ignoring Legal Review: Without legal input, parties may miss essential protections or unintentionally create binding obligations.

By proactively addressing these common mistakes, parties can use the LOI to lay a solid foundation for a successful business acquisition.

Key Components to Include in a Letter of Intent

To ensure your letter of intent to purchase business is clear, effective, and legally sound, include the following elements:

  1. Identification of Parties – Full legal names of the buyer and seller.
  2. Business Description – A clear definition of the business or assets involved.
  3. Proposed Purchase Price – A suggested purchase amount, with explanation if based on EBITDA, revenue multiples, or asset value.
  4. Structure of Transaction – Indicate whether the deal is an asset purchase or stock purchase.
  5. Payment Terms – General details of how and when payments will be made (e.g., lump sum, financing, or earn-outs).
  6. Due Diligence Period – Timeframe and expectations for conducting due diligence.
  7. Confidentiality Clause – To protect sensitive business information.
  8. Exclusivity Agreement – If the buyer wants exclusive rights to negotiate for a certain period.
  9. Closing Conditions – Conditions that must be met before the sale closes.
  10. Non-Binding Language – A statement making it clear that the LOI is not a binding agreement to close the sale.

These sections should be presented clearly and concisely. Each one creates a roadmap for moving forward and ensures that both sides are aligned on critical terms before proceeding to a formal purchase agreement.

Frequently Asked Questions

  1. What is the main purpose of a letter of intent to purchase a business?
    To outline the preliminary terms of a business sale, demonstrate serious intent, and guide future negotiations.
  2. Can a seller back out after signing a letter of intent?
    Yes, unless binding clauses like exclusivity or confidentiality are violated, either party can withdraw before finalizing the sale.
  3. What happens after a letter of intent is signed?
    The buyer typically performs due diligence, and the parties begin drafting a formal purchase agreement.
  4. Do I need a lawyer to write a letter of intent?
    While not required, having a lawyer draft or review the LOI can help protect your interests and clarify enforceability.
  5. How long should a letter of intent be valid?
    Most LOIs include a validity period—often 30 to 90 days—after which the offer expires unless renewed or extended.

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