Letter of Intent- What is an LOI anyway?

Letter of Intent? LOI? What?

The paperwork that goes along with buying a business is a mystery to any new business buyer as well as those that have bought several businesses.

Often the first exchange of paperwork between buyer and seller is the letter of intent or LOI for short. There are LOIs for many business and personal transactions but in my opinion, none are more important than than the LOI for buying a business.

Is it a legal document? Well, not really but it sure looks like one and it can be drafted or looked over by an attorney but it's often a large waste of money to drag in a lawyer at this point.

What the letter of intent basically does is say "I would like to buy your business for an asking price of $XXXX with contingency stipulations A, B, and C but first I want to take a closer look at your business".

Technically, a business purchase letter of intent is really a non-binding agreement, which is why you don't need an attorney. But is does set the tone for what will be needed and how the due diligence will be conducted. It also structures what will end up being the purchase agreement (this should save you some legal fees if done correctly).

The LOI comes into play when you are ready to make an offer based on what you currently know about the business. Usually after looking at a profile, making a visit, taking a walk through and asking the seller/broker about operational questions.

In the LOI, right up front, is where you will make your initial offer based on this current knowledge. It will also spell out things like deposits, notes details and contingency items that must happen. Contingencies meaning things like the lease being transferred or a license being transferred/obtained or passing of some sort of necessary official inspection.

Don't think that you will hand in a 2 page LOI and roil right into due diligence either.

First off, the seller has to agree to everything including your offer. This may go back and forth a few times (which is why a broker and/or advisor representing both parties is highly recommended) before it gets agreed upon.

Keep in mind that signing this agreement means the seller is obligated to hold off on entertaining any other potential offers (it should be stated in the LOI of course). With that said, at this point the seller has every right to do a little background check on you that usually, at a minimum will have them asking you for proof of funds.

If you don't have the money you are suggesting as a deposit (used to secure the LOI and is refundable) and down payment (made when agreed to make the purchase agreement), there is no point for you or them to go any further.

There is obviously more to a letter of intent to buy a business but I can't write about everything here. For more information I would seriously suggest grabbing my e-book/toolkit on successfully buying a good business.

If you just want a template to use for the LOI (with a due diligence checklist bonus) you can grab the LOI Toolkit from the business-buying-help.com site. It contains the same templates I use for my own business purchases/sales as well as for my clients.

This agreement starts the true negotiations and nitty-gritty stuff when buying a business and really should not be taken lightly or you will find sellers not wanting to deal with you or find yourself on the wrong end of a bad deal.


To Your Business Buying Success-

The Business Buying Guru