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What Should You Include In Your Letter of Intent (LOI) When Buying a Business?

The first step of buying a business is the buyer signing a Letter of Intent or "LOI" which shows the seller that the buyer is serious. A LOI is a formal non-binding offer to buy a business from a seller. Even though LOIs are mostly not binding, they are still important to the business purchase because they include the essential terms of the deal. So what should your LOI include?

1. Purchase price
2. Whether the sale will be an asset sale or a stock sale
3. No-shop clause, which prohibits the seller from accepting other offers
4. Terms the buyer insists on in order to move the deal forward. A common example is a buyer often requires the seller's key people to remain in the company to help the transition.
5. Deal-breakers
6. Buyer's right to access seller's documents and financials
7. Confidentiality clause
8. Non-binding clause, to remove any doubt that the LOI is non-binding
9. Timeline or expiration date for the LOI

Be Careful About Adding Too Much to Your LOI

Buyer beware, though! If a buyer puts too many key terms, it may start looking like a purchase agreement. The court considers the following factors to determine if it is binding or not: (1) whether the agreement will be put in writing; (2) the level of detail contained in the letter of intent; (3) whether ...

What is Due Diligence?

Due diligence is the process of examining the business details and data when buying a business. It's similar to inspecting a home before closing on the house. A buyer will want to check, to name a few things, the financial health of the company, the quality of the standard operating procedures, manuals, policies, tax, legal, and other liabilities. The buyer gets this information by requesting it from the seller. In addition, the seller can get information from third parties such as a tax clearance from the state, to see if or what outstanding taxes the seller has, and liens on any equipment.

Why is Due Diligence Important?

The most obvious reason why the due diligence process is important is that the buyer gets to see what he or she is really buying. A buyer shouldn't take the seller's word about the value of the business.  Another less obvious reason is that if the seller lies to the buyer about anything regarding the seller's company, the buyer will have no leg to stand on in court because the court will note that the buyer did not bother taking measure to prevent being a victim of fraud. (I published a whole article on this topic). Lastly, due diligence is important because it forms the basis of the purchase agreement. For example, if, during due diligence, the seller's equipment was required to be ...