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April 2, 2024

Letter of Intent (LOI) to Purchase a Business: What Is It, What To Include & How To Write One

The letter of intent is important to set the tone of negotiations, but it’s not the ultimate step of an acquisition. Here’s a guide to do it right.

Letter of Intent (LOI) to Purchase a Business: What Is It, What To Include & How To Write One

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    The world of business acquisition is thrilling, but before diving headfirst into negotiations, a crucial first step paves the way for a smooth transaction: drafting a Letter of Intent (LOI). This document serves as a roadmap for both buyer and seller, outlining the key terms of the potential acquisition and setting the stage for a successful deal.

    In this article, we will explore how to write an LOI properly so that the transaction you’re looking forward to making is successful.

    What is a Letter of Intent?

    Also known as a Letter of Interest, it is a document that expresses a buyer's serious interest in purchasing a business. It outlines the main points of the potential transaction, including the purchase price, payment terms, due diligence process, and a timeline for completing the sale.

    While not always legally enforceable, a Letter of Intent establishes a negotiation framework and demonstrates the buyer's commitment to the process. It also works as a way of committing to the seller but not as seriously enough, so you can’t break the deal if factors change during the negotiation.

    "If things go bad, you need to be ready to walk away. An LOI is not a firm commitment, and if the rules of the game change during that time, you need to change your perception of the game", says Pascal Levy-Garboua, CEO of Noosa Labs.

    Key benefits of a Letter of Intent (for all parties involved)

    The LOI has benefits for all parties involved.

    • Clarity: The Letter of Intent clarifies both parties' expectations regarding the price, terms, and timeline of the acquisition.
    • Focus: It helps steer negotiations towards the most critical aspects of the deal, avoiding wasted time on irrelevant details.
    • Goodwill: A well-crafted Letter of Intent demonstrates a buyer's seriousness and professionalism, fostering goodwill and trust with the seller.
    • Securing funding: For buyers seeking financing, an LOI with a proposed price range can prove their intent and strengthen their loan application.

    What to include in a Letter of Intent

    An effective LOI should be clear, concise, and cover the essential aspects of the proposed acquisition. Here's a breakdown of the key elements to include:

    1. Introduction

    Start by stating the purpose of the document – expressing your interest in acquiring the business, and identify both parties involved, including the buyer's name and the seller's business name.

    2. Description of the transaction

    Briefly describe the type of merger or acquisition being proposed. Are you interested in purchasing the entire business, specific assets, or a controlling interest in the company?

    3. Purchase price

    Outline a proposed purchase price range, which can be a single number or a bracket, acknowledging the need for further due diligence before finalizing the price. Specify the form of payment (cash, stock, or a combination).

    4. Due diligence

    Define the process by which the buyer will thoroughly examine the business's financial records, legal standing, and operational details. Outline the timeframe for due diligence and specify any information the seller needs to provide.

    5. Contingencies

    List any conditions that must be met for the deal to be finalized. Examples include securing financing, obtaining necessary regulatory approvals, or satisfactory completion of due diligence.

    6. Exclusivity

    This clause grants the buyer exclusive negotiation rights with the seller for a pre-determined period. This prevents the seller from entertaining offers from other potential buyers.

    7. Closing

    Indicate a target timeframe for completing the sale and a closing date. This provides a clear sense of direction for both parties.

    8. Confidentiality

    Include a confidentiality clause prohibiting both parties from disclosing the details of the Letter of Intent or any sensitive business information to unauthorized third parties.

    9. Non-binding agreement

    Clearly state that the LOI is non-binding and does not constitute a legally binding contract.

    How to Write a Letter of Intent

    There's no one-size-fits-all template for an LOI. However, you can structure your document based on the following:

    • Formal business letter format: Use a professional letter format with clear headings and concise language.
    • Clear and concise communication: Avoid legal jargon and complex sentences. Strive for clarity and easy comprehension.
    • Focus on key points: Don't overwhelm the reader with minute details. Focus on the most important aspects of the proposed transaction.

    Example of a Letter of Intent

    Here is a sample structure to get you started. By following these guidelines and tailoring the content to your specific situation, you can craft a Letter of Intent that paves the way for a smooth and successful business acquisition.

    [Your Name/Company Name]
    [Your Address]
    [Your Contact Information]

    [Seller Name/Company Name]
    [Seller Address]
    [Seller Contact Information]

    RE: Letter of Intent to Acquire [Business Name]

    Dear [Seller Name],

    This Letter of Intent (LOI) expresses our serious interest in acquiring [Business Name]. We believe this acquisition presents a strategic opportunity for [your company] to [explain how acquiring the business benefits your company, e.g., expand our product offerings and reach new customer segments].

    We are interested in acquiring [specify what you're buying, e.g., the entire business, including all assets and liabilities].

    We propose a purchase price in the range of [amount] to [amount], subject to finalization after satisfactory completion of due diligence. The final purchase price will be determined based on [factors influencing the final price, e.g., a review of the company's financial statements and inventory levels]. We are prepared to offer [payment method, e.g., a combination of cash and seller financing].

    We will conduct a comprehensive due diligence process to thoroughly examine the financial condition, legal standing, and operational details of [Business Name]. This process will involve reviewing [list of documents you'll need to review]. We expect the due diligence process to be completed within [number] days, subject to your timely provision of all requested information.

    This acquisition is contingent upon the following:
    - Satisfactory completion of due diligence.
    - Obtaining necessary financing (if applicable).
    - Receiving all required regulatory approvals.

    [If you seek exclusive negotiation rights, include this clause:]
    We request a period of [number] days of exclusivity during which you will not negotiate the sale of [Business Name] with any other potential buyer.

    We propose a target closing date of [date]. We are confident that this acquisition will be beneficial to both parties and look forward to working with you to finalize the details.

    We agree to maintain the confidentiality of all information disclosed by you in connection with this LOI.

    This LOI is a non-binding expression of our interest and does not constitute a legally binding contract.

    [Your Signature]
    [Your Printed Name]
    [Your Title]

    [Attach a signature page for the seller]

    Is a letter of intent legally binding?

    In general, a Letter of Intent is not legally binding. It functions more as a roadmap for future negotiations and expresses the good faith of both parties involved to reach a final, legally enforceable agreement.

    However, there are some exceptions. Even if the overall LOI is stated as non-binding, certain clauses can be crafted to be legally enforceable. 

    This often applies to confidentiality agreements or provisions restricting the parties from pursuing other deals while negotiations are ongoing. Also, if the language used in the LOI is vague or ambiguous, a court could interpret it as a binding contract, especially if the parties acted in a way consistent with the LOI. To avoid any confusion, it's best to have a lawyer review your LOI and ensure it clearly states whether it's binding or non-binding, as we specified in our previous LOI example.

    When is the time to draft the letter of intent?

    Once you've done preliminary research on the business you want to buy and have a good understanding of its financial health and potential, you can draft the letter of intent.

    In other words, the best time to draft your LOI is after the due diligence and before negotiating definitive agreements to signal your formal interest in proceeding with the deal.

    Get support in the negotiation process

    While an LOI is not a complex legal document, consulting with a business lawyer is highly recommended. They can ensure the document accurately reflects your interests and protects your rights. 

    Boopos offers guidance through the negotiation process, ensuring you get the most favorable terms for your acquisition. Explore our listings and get support from our advisors!

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