LOI to Purchase a Business (How to Write + Key Components)
As a seller, receiving a Letter of Intent to purchase your business may be a key defining step toward a successful business sale. But what is it, and how can it guide the pending transaction?
Let's find out more in this guide! Before we delve into the finer details, we acknowledge that handling a Letter of Intent on your own can be challenging.
At Exitwise, we can help you hire the right business attorney who may help you understand the Letters of Intent you receive so you can negotiate better. Consult with us today so you may get all the help you need to maximize your business exit!
What is an LOI in Business?
A LOI or Letter of Intent is a written document a potential buyer or their representative sends to you as a business seller to express their genuine interest in buying your business.
The document usually takes the form of a letter, which the buyer or their representative addresses to you as the business owner or your representative team.
Depending on the circumstances, the letter may come from an unsolicited offer to buy your business or after you put your business on the market.
Is an LOI Binding?
A letter of Intent for a business purchase is usually not legally binding. However, the buyer may want the letter to be legally binding, which they typically indicate in the document.
The LOI may be binding in its entirety or part, depending on its wording, even if the buyer hasn't expressly requested that the document be legally binding.
A legally binding LOI is referred to as a binding LOI, while a non-binding one is called a non-binding LOI.
Pros and Cons of Using an LOI in Business Acquisitions
Using a Letter of Intent to purchase a company can bring both benefits and disadvantages. Here are some pros and cons to consider:
Pros | Cons |
|---|---|
An LOI may help streamline negotiations and increase the chances of a successful sale because you may be assured of the buyer's commitment. | If the letter is not legally binding, both you and the seller may not feel obligated to see the deal through, which may lead to frustrations and wasted efforts. |
The LOI typically outlines the framework for due diligence, which helps both parties move forward if the business turns out as advertised. | You may have to disclose sensitive information about yourself or the business, which may hurt your competitive advantage if the negotiations flop or the deal collapses altogether. |
An LOI may help prevent disputes as you and the buyer understand the expectations from the onset if the terms and conditions have been clarified well. | Your selling options may be limited if the buyer adds an exclusivity clause barring you from engaging other prospective buyers. |
Outlining the essentials of the transaction without negotiating and conclusively determining the specifics prematurely may save both you and the buyer time and money. | Poor wording in an LOI may make it legally binding, even when the document states it is non-binding, and this may result in litigation expenses trying to determine whether or not the LOI is binding. |
Generally, the pros of using a Letter of Intent to buy a company outweigh the cons.
One of the most important things is that the LOI can establish good faith between you and the potential buyer, even as the document is typically non-binding.
How to Write a Letter of Intent to Buy a Business
Before we proceed, it's worth noting that you typically don't need to write a Letter of Intent when selling your business. The letter comes to you from a potential buyer.
However, you may want to put yourself in the shoes of the buyer to see how you would write an LOI if you were the buyer. Such a step can help you understand the sale process better, including the true worth of your business.
Here's how your potential buyer may write you a Letter of Intent to buy your business:
Introduction: The buyer or their representative may start by introducing themselves and their company. They may also include the contact information of the exact person you should reach out to regarding the LOI.
Declaring Intent: The buyer can clearly state their intention from the very beginning by saying they want to purchase your business. They may also explain why they feel your business may be a great fit for them or their company.
Describing the Sale: Your potential buyer may outline the terms and conditions they propose for the purchase, such as the purchase price, type of financing, and payment terms.
Defining the Timeline: The buyer may suggest a timeline for negotiating and completing the transaction. They may also suggest crucial milestones or deadlines.
Outlining Conditions: If the buyer has any contingencies or conditions they would like you to meet before you conclude the sale, they may state them in this section. For example, they may ask that you secure the necessary approvals from stakeholders and relevant authorities.
Showing Enthusiasm: Your prospective buyer may end the letter by expressing their excitement about the opportunity.
Sample Letter of Intent to Purchase a Business
Letters of Intent are usually kept confidential. Here’s a sample to help you visualize what you may expect:
[Your Name]
[Your Address]
[City, State, ZIP Code]
[Email Address]
[Phone Number]
[Date]
[Seller’s Name]
[Seller’s Business Name]
[Business Address]
[City, State, ZIP Code]
Dear [Seller’s Name],
Re: Letter of Intent to Purchase [Business Name]
I am writing to express my intent to purchase [Business Name] (the "Business"), located at [Business Address]. This Letter of Intent ("LOI") outlines the general terms and conditions under which I propose to acquire the Business.
1. Purchase Price
______
2. Terms of Payment
______
3. Due Diligence Plan
______
4. Closing Date
______
5. Confidentiality
______
6. Exclusivity
______
7. Non-Binding Agreement
______
8. Governing Law
______
Sincerely,
[Your Name]
[Your Title, if applicable]
Key Components Every Business Purchase LOI Must Include
Each Letter of Intent to purchase a business is different, depending on the transaction, potential buyer, and industry norms.
You may expect most business purchase Letters of Intent to include the following elements:
1. Introduction and Identities of the Seller and Buyer
Most business purchase LOIs usually begin with a brief introduction of the buyer, seller, or their representatives. The buyer or their representative often includes their contact information.
The buy-side usually also mentions the target business or company’s name, size, industry, location, and other details to try and clarify the transaction.
2. Proposed Purchase Price
The buyer usually proposes a purchase price for your business. The price may come along with other related transaction details, such as the payment terms and source of finances.
3. Timeline
Your potential buyer may indicate the date by which they expect to close the transaction, including expected deadlines for due diligence, further negotiations, and closing the sale.
4. Closing Conditions
The buyer may describe any conditions they would like to be met before you can both complete the transaction. For example, they may request that you comply with all the state and national regulations for business sales.
5. Confidentiality Agreement
Your potential buyer may ask you to maintain confidentiality during the negotiations. You may need to sign a non-disclosure agreement.
6. Due Diligence Journey
Since the LOI usually precedes a deeper dive into due diligence, your buyer may indicate what process the buy-side due diligence will take.
7. Binding or Non-Binding Clause
The buy-side may include a clause to explain whether the LOI is binding or non-binding.
8. Employee Considerations
If your prospective buyer wishes to retain you or your key employees in the new entity, they may indicate as much in their LOI.
9. Cost Responsibility and Distribution
The buy-side usually estimates the expenses related to the proposed deal, whether or not it closes successfully. They may suggest who between you and them should be responsible for what costs and the corresponding amounts.
10. Exclusivity Clause
Usually, the buyer specifies a period during which you may not negotiate the business sale with other prospective buyers.
The clause is typically meant to give enough room for due diligence to end and to eliminate further competition for the sale.
11. Signatures of the Stakeholders
For the LOI to be complete, the buyer or their representative usually appends their signature to the document. Other buy-side stakeholders, such as witnesses to the transaction, may also sign.
The LOI typically also has space for the sell-side to append their signatures once you and the buy-side agree on the contents of the letter.
Having these many components means that an LOI can be confusing. When selling a business, you'll want to work with an experienced business attorney to help you understand the finer details of the LOIs you may receive.
We at Exitwise can help you find and work with the best M&A attorneys and other experts. Let us work with you to help you get the successful exit you have been hoping for!
Best Practices for Writing an Effective LOI
We mentioned earlier that potential buyers typically write you an LOI to purchase your business. Knowing the best practices for writing a good LOI may help you qualify a buyer based on their professionalism.
Here's what to look out for:
Addressing the Buyer Directly: You can tell the buyer is worth their salt if they address you or your representative directly. They may mention you by name or refer to your business's name.
Being Specific But Detailed: If the buy-side is as detailed as possible at the LOI stage, it may be a sign that they have carefully considered and understood the proposed deal.
Stating Whether the LOI is Binding: Typically, each LOI explains whether it is binding or not. The buyer may also indicate which sections are legally binding, such as the exclusivity clause and confidentiality agreements.
Outlining the Financing Details: The buyer may score better with you if they explain how they intend to finance the purchase. The options may include debt financing, an earn-out system, or cash payment.
Defining the Due Diligence Scope and Guidelines: A detailed outline of the expected due diligence process can help avoid disputes about how and how much the buyer will investigate your company.
Frequently Asked Questions (FAQs)
Below are a few common questions surrounding business purchase LOIs.
What is the Process After Submitting Your Letter of Intent?
The typical M&A process includes the buy-side sending out a teaser, potential buyers sending Indications of Interest and signing an NDA, and the seller sending out a Confidential Information Memorandum (CIM).
The LOI typically follows the CIM and is followed by deeper due diligence, continued negotiations, the Definitive Purchase Agreement, and the closing of the sale.
Do I Need an Attorney to Draft or Review an LOI?
Generally, you don't need an attorney to draft or review an LOI. However, we recommend hiring an experienced attorney.
When you work with us at Exitwise, we can help you find the best M&A attorney who can help you review all your LOIs so you may protect your interests and negotiate the terms and conditions successfully.
How Long is a Letter of Intent Valid?
The buy-side typically indicates how long the LOI remains valid and the date on which the letter should terminate if the sell-side doesn't sign and accept it.
The validity period may depend on the buyer's preference, industry norms, and the circumstances of the transaction.
Typically, the buyer gives you 3-4 business days to accept the LOI, but in some cases, the duration may be 1-2 weeks.
You'll want to work with a buy-side that's open to negotiations about the validity and possible termination date so you may have time to carefully consider the offer before deciding.
Conclusion
When you receive a Letter of Intent to purchase your business, you may want help from a qualified business attorney to carefully consider and negotiate its terms and conditions.
Finding a great M&A attorney on your own can be tasking, which is why we at Exitwise work with you to help you hire the best. Talk to us today so we can connect you with your dream M&A attorneys and other experts to help you sell your business successfully.
