Why You Need a Letter of Intent (LOI) for Your Business Purchase

Business sales involve risks. It’s natural for both buyers and sellers to have hopes and apprehensions about a merger or sale. A business purchase negotiation requires trust between a buyer and seller as they work to come to an agreement.

A Letter of Intent (LOI) is a crucial part of a successful business sale. An LOI acts as an informal way to kick off a negotiation between a buyer and seller in a business purchase transaction.

Your Letter of Intent essentially “sets the stage” for your business purchase. The LOI terms will clarify the expectations of both sides going into the purchase. Whether you're the buyer or the seller in the sale, both parties benefit from drafting an LOI early on in the process.

Because an LOI is the first step in the business purchase process, you want to start on the right foot. That means you want to get an attorney involved to help draft the LOI for you.

Drafting a Letter of Intent on your own could lead to mistakes down the road. At Holmes Business Law, we often get clients who’ve already drafted Letters of Intent with unfavorable terms. These terms are harder to undo compared to getting them right the first time around.

Our experienced lawyers help companies with business sales every day. Call our Philadelphia area offices now at 215-482-0285 to get your business purchase transaction on the right track.

What’s a Letter of Intent When Selling or Buying a Business?Letters of Intent (sometimes called Memorandum of Understanding) are often non-binding under the law. But many courts will uphold or at least consider their terms in the case of a dispute – especially if there are no other legally binding documents. The parties may also choose to make the terms binding if they’d like.

Think of an LOI as an agreement to agree, setting out the path for your sale.

A Letter of Intent is a way to move the business purchase transaction forward. An LOI signals between buyer and seller that both parties are serious about negotiating a sale. Don’t let the informal nature of the agreement fool you – the terms you agree to now lay down the groundwork for the ultimate outcome of your business sale.
A Letter of Intent comes into play after:

• A buyer finds a business they want to purchase,
• A price is set by a broker or business listing, and
• The buyer signs a non-disclosure agreement to move forward.

At that point, the buyer will submit their business purchase Letter of Intent to the seller. Both sides should have legal counsel to help them negotiate the terms before signing.
If your Letter of Intent is non-binding, it can be overruled in a court of law by other executed contracts or documents that have greater legal authority.

What Needs to Be Included in a Letter of Intent?From a buyer’s point of view, a Letter of Intent expresses the terms under which you’re willing to buy the business. Think of it as the first volley in a negotiation.

A Letter of Intent should set out the following terms:

• How much money is the buyer willing to offer to purchase the business?
• Are there any other assets like real estate included with the business purchase?
• Which assets or items are not included in the sale?
• Does the buyer take on any assumed liabilities?
• Is the Letter of Intent legally binding?
• Will the buyer pay a deposit, who will hold it, and is it refundable under any conditions?
• What documents does the buyer expect to see for due diligence?
• How long will due diligence last?
• What is the target date for the sale?
• Which party will handle closing costs and expenses?
• Is there an exclusivity or “no-shop” period and how long does it last?
• Does the agreement expire or terminate and when?
• Are there any other contingencies that the buyer needs before the sale?

Contingencies lay out what the buyer expects to happen before they’re ready to close the purchase. That could mean obtaining a commercial lease, securing additional financing, or providing the buyer with the necessary tax documents to determine profitability.

An LOI may seem straightforward, but you should beware of some tricky parts. For example, some brokers may not want to return the buyer’s deposit if they decide to back out of the purchase for any reason that’s not based on the contingencies in the LOI. You must make sure that the proper wording is included in the deposit language in the letter.

If you’re looking to buy a business, you should have a lawyer draft the LOI for you. A lawyer can anticipate any potential issues and include terms for them in the language of the letter.
If you’re selling a business, you should have a business lawyer look over the terms of any Letters of Intent you receive from potential buyers. If you fail to consult an attorney, you may end up giving up certain rights in the letter, leading to losses down the road.

Negotiating Your Letter of IntentEven though the buyer starts by preparing the Letter of Intent, the seller must respond to protect their interests in their company. The business purchase negotiation process begins with the LOI.

Whether you’re on the drafting side or the responding side, you need a business lawyer to help negotiate the terms that could end up defining your business sale. It’s especially important to involve an attorney early in the process – ideally as early as possible.

When buyers write their own Letter of Intent without consulting a lawyer, they often include terms that hurt their bottom line without realizing it. And once the LOI has been sent to the seller, whatever terms are included become harder to change. So you want to talk to a lawyer before you send your LOI if possible.

In fact, the earlier you get a lawyer involved in the LOI drafting process, the better a deal we can negotiate for you. At Holmes Business Law, our experienced lawyers can draft or negotiate your LOI with all the terms you need to make a successful sale.
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Call our Philadelphia offices today at 215-482-0285 to get started with our legal team.