Letter of Intent to Purchase Business (Templates, Guide, Tips)

Before a seller agrees to sell their business, they want to make sure they get the best deal possible. The formal negotiations between the buyer and the seller begin with a letter of intent (LOI) to buy a business. It offers the buyer a chance to convey their proposition. However, as the negotiations continue, the purchase conditions stated in it could change. As a result, it is not binding. Nevertheless, the items discussed in it will often be included in the final agreement before purchase. This article will explain what a letter of intent for a business purchase is, who should sign it, and how to write one.

What is a Letter of Intent?

A letter of intent to purchase a business, as the name implies, is written by the buyer of a business to notify the seller that they intend to purchase their company and to outline the terms of the agreement under which they intend to proceed. To protect both the buyer and seller, this agreement should outline everything about the potential sale, from the price to what will happen if the deal does not take place.

Importance

This document aims to provide the seller with an early indication of the buyer’s intention, outlining what they expect to achieve and how they plan on doing it. Additionally, it helps to avoid any last-minute deals when the parties are negotiating before a purchase is made. Letters of intent can be used for various kinds of business purchases, like buyouts or acquisitions, mergers, joint ventures, etc.

A letter of intent also provides non-legally binding protection to both signatories. For example, it protects the buyer from any last-minute changes in the seller’s plans that may alter the agreement. The terms and conditions of the transaction are also described before a formal agreement is made. The document can also be used to secure loans to raise funding for the purchase. 

Free Templates

Business Purchase Letter of Intent Template 01

Business Purchase Letter of Intent Template 02

Business Entity Purchase Letter of Intent Template

Mutual Interest Business Purchase Letter of Intent Template

Types of LOIs

There are two types of letters of intent: short-form and long-form. You can choose to use either of these, depending on what you wish to accomplish:

Long-form 

A long-form letter of intent is comprehensive and has a broad scope. It must include all pertinent information regarding the buyer’s intentions, including the buyer’s identity, confidentiality, dispute resolution procedures, the closing date, and any special terms or conditions.

Because of their scope, they are more detailed and help prevent the majority of issues. They can speed up and streamline the transaction, lowering the cost due to the avoidance of legal fees. As a result, this type is more common when purchasing large and complex companies.

Short-form 

A short-form letter of intent covers the main terms and conditions. This type of LOI can also be used for mergers and acquisitions, in which only one party needs to sign the document. The more intricate details are reserved for a later time because they typically do not specify the particular terms of the transaction but merely note what both parties propose for the agreement and how it should be executed. This kind is typically used to buy a company through mergers and acquisitions that are small enough to only need one signatory.

Components of Letter of Intent to Purchase Business

Several components form the core of a letter of intent to purchase a business. The following sections explain these components:

Effective date and subject

The effective date should be written at the beginning. It is also known as the date of execution. The subject, which is the intent to purchase the business, should also be stated.

Names and mailing addresses of the parties 

Information about all parties must be included, and each party’s name must be written in full. Include the name, address, phone number, and email address of the person signing the document as well. Sometimes, fax numbers may also be mentioned.

Purchase price and transaction type

It determines how much the buyer intends to purchase from the company. Include the price in this section if the buyer is paying a specific amount to the company. If the price is determined in percentages. It should be stated what portion of the company’s value must be purchased. The letter of intent to acquire a business also mentions the payment method (whether cash, entire or part of the stock, promissory notes, etc.) and the type of transaction (if it is an acquisition of all shares, assets, a junction, etc.).

Real estate

A clause that mentions the business’ real estate should be included to cover details about the location of the business. Additionally, information like the mailing address, the real estate’s legal description, and whether any building restrictions may be required should be mentioned.

Payment details

It is critical to specify whether the purchase can be made in one lump sum or in installments. If the payments are made in installments, it must specify how much must be paid each month until the debt is paid in full. Include any additional charges that might be related to the terms, such as late fees or others.

Legally binding nature

An LOI to buy a business may or may not be binding, so it must contain a clause that expressly states whether it is. If made binding, it must indicate the consequences of breaching the terms and direct that a formal agreement is not needed as it serves the same purpose.

Bank accounts

Upon purchase, the buyer is expected to take control of the business’s bank accounts. Thus, the letter of intent must state that the seller is obligated to ensure that the bank accounts remain active or operational before closing, which would imply leaving a certain amount of money in those accounts.

Seller’s responsibilities

It should then state that the seller is obligated to make decisions and take actions in the business’s best interest before and after the sale. Their actions should not disrupt the regular operation of the business. 

Closure of the deal

What happens if the deal is executed should be clear under the “closing” section. Actions that signify the closure of the deal should be indicated. These can include fulfilling the terms of the purchase agreement if the letter of intent is binding or signing the official contract if it is not. 

Costs of the closure

The buyer and seller ought to agree on the closing costs of the deal. This covers all potential costs, such as commissions, legal and notarial fees, and more. Again, these costs can be assigned to both parties or only to the buyer.

Termination

The LOI should specify when it will expire. If a formal agreement has not materialized, the agreement between the buyer and the seller can be terminated. It should also state that either party can terminate the agreement should there be a default. The default is also noted in the event of a termination.

Access to data about the business

The buyer is entitled to any information about the business that may be required to perform due diligence, and both parties must agree to this. However, it must be stated in this section if the seller does not want to divulge delicate information about their company, including its finances.

Conditions

If the buyer is purchasing the business, then the letter of intent should state certain conditions that can affect the deal. This includes clauses that cover issues such as a change in ownership or transfer of ownership, a change in management, or setting a new cash-flow target. Any applicable conditions should be added to this section.

Confidentiality

In an acquisition, both parties may have sensitive or confidential information about the transaction. A confidentiality clause in the document states that neither party will disclose this information to a third party unless necessary.

Good faith negotiations

The letter should note that the buyer and the seller agree to carry out all negotiations in good faith. They must follow this rule by telling the truth and working hard throughout the negotiation process.

Exclusivity

Both parties are prohibited from engaging in similar negotiations with any other party.  However, contracts made before the start of these negotiations are not covered by this clause. 

Representation and warranties

The buyer and seller should also agree to represent specific facts and warranties. For instance, they might decide that the company should have a certain level of assets, income, or working capital before they consider buying it. It must also be stated how the situation will be handled if there is a breach of warranty.

Currency and applicable law

The letter of intent should state which currency is being used for all payments and the applicable law(s) under which the deal will materialize.  

Severability clause

A severability clause states that if any of the terms are declared invalid due to a court order or other legal action, the remaining terms and conditions will still apply.

Dispute resolution

If the buyer and seller’s negotiations fail, the letter of intent should include a clause outlining how the dispute will be resolved. It can include arbitration, mediation, or judicial proceedings.

Counterparts and electronic means

A clause that validates copies of the letter of intent should also be included in the letter. It should also allow electronic copies to be transferred and state that the copies will have the same legal authority as their counterparts, physical copies, and the original letter of intent.

Signatures

It should contain the signatures of both parties. This section should have the addresses of the buyer and seller as well. It should also include the date and time when it was signed. The letter of intent contains terms of sale that must be agreed to by both parties, and this agreement is evidenced by signatures.

Writing a Letter of Intent to Purchase Business

Any prospective buyer or seller should be able to decide from the letter whether they want to pursue a transaction with one another by reading all pertinent information.

The following steps can help create a comprehensive letter of intent to purchase a business:

Write the introduction

The introduction should state the letter’s purpose (to purchase the business), the parties involved (the buyer and seller), and a general description of the business, including its location and contact information, its products or services, and any other relevant information.

Describe the transaction and timelines

The following section should outline the parties’ agreement regarding the specific transaction. This section should also include important details, such as the purchase price and the expected date of the transaction. However, these details are preliminary and are subject to change as the transaction progresses.

List contingencies

This section should list any significant risks or potential problems affecting the transaction. It should include a clause stating that any issues that arise during the due diligence period will be addressed. A common contingency for buyers is that the transaction will not go through unless they are satisfied with their due diligence.

Perform due diligence

The buyers and sellers should perform a risk assessment or due diligence. This is a process by which the parties can determine whether they are willing to buy the business or not. This can be accomplished by using the services of an audit firm, which inspects all relevant documents and records to ensure that there are no irregularities or inaccuracies.

Include covenants and binding agreements

Whether the letter of intent is legally enforceable or not, it may include binding agreements between the seller and the buyer as well as restrictive covenants (sub-agreements). Examples of sub-agreements are NDAs and non-compete covenants. An NDA forbids both parties from disclosing any information that might be confidential or proprietary to the other party.

A non-compete clause forbids the buyer from using any information provided by the seller in confidence to launch a rival company. The parties may also agree to a covenant stating that each party shall pay for its costs incurred in connection with the negotiations, such as accounting fees, legal fees, travel expenses, license fees, etc.

Indicate that it is a non-binding contract

The non-binding nature of the agreement should be clearly mentioned. The execution of a more formal memorandum of sale is required before this letter can be regarded as legally binding.

Write the closing date

The letter of intent should also include a specific closing date. This is the final date that the transaction is expected to close. The final step is to include the signatures and addresses of both parties. It should also be stated that if the closing date comes and the negotiations have not progressed, the transaction and the LOI will be terminated. If there are any outstanding issues with the letter of intent, they should be addressed in this section.

Expert Tips

Some of the tips for writing a comprehensive letter of intent when purchasing or selling a business are:

Provide correct information

Always review the document before sending it to the other party. Ascertain that all the details, such as the company’s name, contact details, amount, etc., are mentioned accurately. The LOI is a formal letter and should be drafted with proper attention.

Keep it short and simple

Keeping the letter of intent short and straightforward is the best way to ensure that it receives the desired attention from the other party. The LOI can record the pertinent details of the transaction only, and the rest can be refined later as negotiations continue.

Hire an attorney (If needed)

Hiring an attorney is advised when both parties are unfamiliar with the legal formalities. This can ensure that both parties better understand its clauses.

Act professionally

Try to ensure that the tone of your letter is professional and is written concisely and clearly. Your words should reflect that you are serious about this transaction. Use statistics, as they are more likely to convince potential sellers or investors to work with you.

Conclusion

A letter of intent to purchase a business is usually a one-page, professional document to establish and promote engagement between prospective buyers and sellers. It is the first and most decisive action taken during the negotiation process. It establishes a connection and builds trust and confidence in each party. It also discusses logistics, timelines, and milestones for the transaction.

It can be a formal, written agreement or a non-binding arrangement. As a result, it will vary from one transaction to another and should contain the specifics of that exact transaction.

About This Article

Authored by:

Brian Beers

Business Writing | BA in Journalism, Master of Business Administration (MBA)

Brian Beers is an expert in business writing with over 15 years of experience in financial news. He has received numerous awards, including an Emmy nomination for his work as the lead producer of the CNBC feature "Boom, Bust and Blame: The Inside Story of America's Economic Crisis." Brian has also rung the opening/closing bell of the stock market three times, twice for the NYSE and once for the NASDAQ. He holds a BA in Journalism and an MBA. His exceptional storytelling skills and insightful analysis make him a sought-after professional in the business writing industry, helping individuals and organizations effectively communicate their ideas and strategies in the business world.