LOI or Letter of Intent when Selling a Business [+Free Template]

Are you buying or selling a business? If you’re here, chances are you’ve heard about a document called LOI or Letter of Intent, but aren’t quite sure what it is or why it matters for your business deal. Don’t worry—you’re not alone. So, it’s time to explain it once and for all.

Download The Letter of Intent (LOI) Template. Copy this doc and edit it according to your business.

What is a Letter of Intent (LOI)?

A Letter of Intent, or LOI, is a preliminary agreement that outlines the basics of a deal between a buyer and seller during an acquisition or a merger. 

Simply, you can call it a “handshake on paper”. This is because it isn’t a legal contract, but it does show that the parties involved are serious and have agreed on some fundamental points before moving forward with signing the actual business contract.

In the case of selling a business, having an LOI helps both sides get a solid understanding of what’s expected in the contract, thereby reducing the risk of misunderstandings down the line.

Think of a Letter of Intent as a document that sets the groundwork for a formal contract.

10 Key Elements of a Letter of Intent (LOI)

The content of a Letter of Intent depends on the specifics of the business you’re buying or selling. But here are 10 common items in a standard LOI:

1. Company name and what’s being bought or sold: The document usually starts with the full names of both parties and a clear description of what’s up for sale. That way, everyone knows exactly who’s involved in the deal and the item of interest.
2. Description of the transaction and timeline: LOIs specify what type of deal this is—whether it’s a stock sale, an asset sale, or a merger. And don’t forget the timeline. How long is it going to take to close the sale?
3. Purchase price and payment terms: A business letter of intent spells out the agreed purchase price and payment details. For instance, is the payment going to be a lump sum, or will it be split into installments?
4. Confidentiality clause: LOIs usually include a confidentiality agreement. This ensures that, successful or not, any sensitive information shared during negotiations stays private.
5. Negotiation guidelines: Here, you’ll outline how the parties will communicate and resolve any conflicts, so there are no surprises.
6. Applicable laws and arbitration: This section specifies which laws apply to the deal and where disputes will be resolved.
7. Due diligence: This part sets a timeline and scope for due diligence. During this period, the buyer digs into the business’s financials, legal commitments, and operations to make sure everything checks out.
8. Exclusivity period: For buyers, an exclusivity clause ensures that the seller won’t entertain offers from other buyers for a set period, giving the buyer time to finalize the deal.
9. Contingencies and conditions: This lists any conditions that need to be met for the transaction to proceed—like securing financing and meeting regulatory requirements.
10. Closing timeline: Set milestones and deadlines to keep both sides on the same page.

Each of these elements helps set expectations for both parties and reduce uncertainties. By this, both parties have a clear roadmap as they work toward the final sale.

Is a Letter of Intent required when buying or selling a business?

Although LOI isn’t a must-do, we highly recommend it before entering into any deal.

But can’t you just jump straight to sign the formal contract? You can but this small step makes the terms and conditions transparent, clarifying the essential elements of the contract right from the start.

I’ve seen countless deals fall apart due to misunderstandings that could’ve been avoided with a well-detailed Letter of Intent. It gives you that peace of mind knowing everyone’s on the same page, which can prevent some of the common (and often costly) missteps in business transactions.

Is an LOI legally binding?

Generally, an LOI isn’t legally binding.

But there are exceptions, and certain sections—like confidentiality or exclusivity clauses—may hold legal weight depending on your local laws and the terms/language used.

Think of the LOI as more of a guide than a binding commitment. You still have some wiggle room until the final contract is signed.

But if you’re uncertain about the legal implications of an LOI, I’d always suggest you talk to a legal expert to confirm which parts are binding. And which isn’t.

What are some potential red flags to look out for in an LOI?

While LOIs are primarily to bring clarity to a future contract, I’ve come across many stories of buyers or sellers who felt outsmarted in a business deal, even with an LOI. To avoid similar headaches, watch out for these red flags when drafting or signing an LOI:

• Unclear terms: Vague conditions or non-specific terms can lead to trouble later.
• Unusual payment terms: If the payment terms seem overly complex or one-sided, don’t sign it yet. it’s worth a closer look.
• No exclusivity clause: For buyers, an LOI without exclusivity might mean the seller’s still shopping around for offers.
• Short due diligence period: A rushed due diligence phase can lead to missed liabilities or other issues.

Spotting these signs early enough can help you steer clear of unfavorable terms and save you a lot of disappointments.

What happens after signing the LOI?

Once the LOI is signed, it’s time for due diligence. The buyer will be checking out the financial records, legal commitments, assets, and more to ensure they’re making a sound purchase.

After this is clear, both parties will finalize the details of the purchase agreement and make necessary adjustments based on due diligence findings.

At last, As the closing date approaches, you’ll set up logistics, make sure conditions are met, and wrap up any required paperwork. A signed LOI gets the wheels moving, keeping everyone organized and on track toward finalizing the sale.

Takeaways

Now you know how LOI works when buying and selling a business. While the document isn’t always legally binding, it lays the foundation for a smoother negotiation process.

If you’re preparing or signing an LOI, remember the essential elements in this article, watch out for red flags, and consult a professional to clarify if there are any binding clauses. With a solid LOI in place, you’re one good step closer to sealing a fulfilling deal.