A letter of intent for a business is the document that turns a handshake into a plan. It records the main terms a buyer and seller have discussed before they spend serious time and money on due diligence and final contracts.
What a letter of intent for a business does
A letter of intent, often called an LOI, summarizes the proposed price, structure, timeline, and conditions of a deal. It usually comes after initial conversations and an early look at the financials, and before the detailed purchase agreement is drafted.
For buyers, it signals serious interest and sets the framework for due diligence. Also, for sellers, it shows that the buyer is committed enough to negotiate in good faith.
Terms to include
Every deal is different, but most letters of intent cover the same core points. Having them in writing early prevents misunderstandings later.
- Purchase price and how it will be paid
- Assets or ownership interests included in the sale
- Any seller financing, earnout, or escrow terms
- Due diligence period and what the buyer may review
- Expected closing date and conditions to closing
- Transition support and any non-compete expectations
Which parts are binding
A letter of intent for a business is often described as non-binding, but it commonly contains sections that are binding, such as confidentiality, exclusivity, and who pays which expenses. Exclusivity, sometimes called a no-shop clause, prevents the seller from negotiating with other buyers for a set period.
Because wording matters, have an attorney review which provisions bind each side before you sign.
Common mistakes to avoid
Buyers sometimes agree to a long exclusivity period without a clear timeline for due diligence. Sellers sometimes accept a price without understanding how it will be adjusted for inventory, debts, or working capital. Also, a vague letter of intent for a business can lead to renegotiation at the worst possible moment.
Be specific about assumptions, and make clear that the final price depends on the results of due diligence.
Use the letter as a roadmap
After you sign, the letter of intent becomes a checklist. Both sides know what is expected, by when, and from whom. Pair it with the steps in our due diligence guide so nothing important is missed before the final agreement.
Get professional help on your letter of intent for a business
An attorney and an accountant can help you draft or review the document so that it protects your interests without scaring the other side away. A short investment in advice at this stage can prevent expensive problems later.
More guidance on the letter of intent for a business and related steps
- How to Buy an Existing Business: A Due Diligence Guide
- Working With a Business Broker: How to Find One and What It Costs
- How to Value a Business Before You Buy: Multiples and Seller’s Discretionary Earnings
- SBA guide to planning your business
- Business Broker Commission: How Fees Work for Sellers
- Distributorship Agreement: Key Terms to Review Before You Sign
For more background: U.S. Department of the Treasury.
Keep reading
If this topic is useful to you, these related guides on SmartBizOpps are a good next step.
