Business Purchase Letter of Intent

What exactly is a Business Purchase Letter of Intent or LOI?

This seems like a very scary document but actually it's not.  Technically, a business purchase letter of intent is really a non-binding agreement that says "I would like to buy your business for an asking price of $XXXX with contingency stipulations A, B, and C but first I want to take a closer look at your business".

Again, it seems complicated but it's really a very simple semi-legal looking document that gets the ball rolling.

You should be aware that before a seller signs the LOI, they have the right to ask for proof of funds. If the seller is holding a note, the funds would be the down payment. If you are getting a bank loan, then proof of a contingent approval is often required.

If you can't show the funds needed to make the deal work, it will be a waste of time for them to sign. For this reason, you should have already prepared yourself by reading the page on this site about funds for buying a business.

Before you go forward and read the information below on a business purchase letter of intent, it is important that you have already prepared yourself to buy, find and value a business. To make sure you are ready for the information on this page, please look at the Preparation, Finding a Business and Business Valuations pages first.

(Get a head start by picking up a free report on preparing to buy a business.)

Business Purchase Letter of Intent- When Does This Happen?

The business purchase letter of intent comes into play once you have decided that you like what you have seen so far and are seriously considering buying the business.

This document should be provided by the buyer, since it has a lot of buyer related requests in it for the seller to adhere to for due diligence. If a broker is involved, they will help with putting this together. There is no need for a lawyer when dealing with this document.

You may want to get a business buying savvy accountant involved though to make sure you are asking for all of the necessary financial documents you may need for due diligence.

Business Purchase Letter of Intent- What's the True Purpose?

The purpose of an LOI has a few sides to it. First, it tells the seller that you have a genuine interest in the business. Next, it technically holds the seller up from entertaining another buyer by setting in motion a due diligence period.

The due diligence period allows you to dig deep into the business and also "prove" the seller's claims about the revenue, expenses and operations of the company.

The business purchase letter of intent presents a written offer of the purchase price that has been excepted by both the buyer and seller along with the agreed upon seller financing terms (if any) and any other formally verbal agreements such as how inventory will be handled and if any liabilities will be assumed.

In addition, the contingencies to the sale that the buyer has established will be in this document. These contingencies vary based on the industry, but basically spell out what type of documents the buyer needs to see, what financial factors need to be "proven" true (such as weekly revenues) the ability to obtain a new lease for the property, the ability to transfer any licenses and so on.

Put it all together and this 2 to 4 page document spells out the basis for the final contract should the buyer and seller decide to move to the contract phase.

Business Purchase Letter of Intent- What Do You Mean By "Not Legally-Binding"?

An LOI is a non-binding agreement regarding being completely committed to buying the business with no way out. It's not so much a legal document as it is a blueprint of what will eventually be a legal document at the end of the due diligence period.

DO NOT mistaken the LOI as something that is not taken seriously by the seller and broker. That is why a deposit is taken.

A "good faith" deposit is required with the LOI and is usually $1000 to $5000 but may vary. This is especially true when working with a broker. This fee is fully refundable if at the end of due diligence (or during it) the seller has a change of heart or the buyer finds that the contingencies in the LOI were not met.

The LOI also states certain dates such as what happens after the due diligence period. Basically it says the buyer will make a decision immediately following the period end, if not before, on whether to go to contract. It also states that if after the due diligence period both parties are good to go, the purchase agreement will be started by a specific date with a round about closing date to keep things moving as much as possible.

As for the deposit, it gets handled differntly depending on the attorneys. Sometimes it gets handed back at closing or it gets subtracted from the down payment. If for some reason the buyer backs out once the purchase contracts are started, the deposit is often forfeited as breaking the good faith of the deal that the Seller extended by holding off on showing it to other potential buyers and for paying an attorney to move forward. But we are not lawyers here so this is very situational and a variety of actions have been witnessed in these situations.

Business Purchase Letter of Intent- Why Bother with One?

A business purchase letter of intent is truly a necessary document in the buy/sell process.  It sets the tone for the final contract but also lines the buyer and seller up for a smoother transaction.

Without it, you may end up getting information very slowly, or not at all. And without it, the seller is wide open entertain as many other offers as he wants and allow others to perform due diligence as well. This causes an unnecessary rat race to finish as fast as possible doing your due diligence, which is not a good idea at all.

Business Purchase Letter of Intent- It's Signed, Now What?

Once the business purchase letter of intent is signed, the game is on. The agreement should state that the due diligence period starts as soon as you get all of the requested documents from the seller. After the due diligence process is completed, it's time to adjust your offer price or stick to your guns and move on to the contract phase.

Now you know the basics of LOI's but the documentation samples and due diligence know-how are inside of the toolkit below for the serious business buyer.