What Should Go Into a Letter of Intent When Purchasing a Business

So you're thinking about buying a business and you're at the Letter of Intent stage? Well, let’s talk about what you should be including in that LOI to make sure the process moves forward smoothly.

The Letter of Intent is a crucial step when buying a business, and while it's not binding, it sets the stage for the deal and outlines the key terms both parties agree on before getting into the nitty-gritty of due diligence and contracts.

Here’s what you want to make sure is covered in your LOI:

1. Start with the Purpose The first thing you want to do is clarify what this LOI is all about: it’s a non-binding document that outlines the preliminary agreement between you and the seller. It's a good idea to mention here that the LOI is non-binding, but note any exceptions, like confidentiality or exclusivity, which might be legally binding.

2. Give a Quick Overview of the Business You’ll need a brief but clear description of the business you’re planning to buy. Be sure to include the name, what the business does, and the scope of the sale—whether it’s assets, shares, or the entire company.

3. Get Into the Purchase Price and Terms This is where you lay out the proposed purchase price or range. Don’t forget to detail how the transaction will be structured—will it be a lump sum, installments, or maybe seller financing? Mention any price adjustments that could be made based on what you find during due diligence, like changes in working capital.

4. What’s Included in the Sale Whether you’re buying assets or stock, list the important items. If it’s assets, mention equipment, intellectual property, contracts, inventory, and real estate. If it’s a stock purchase, clarify that and make sure to mention any liabilities that will remain with the seller.

5. Who’s Responsible for What Liabilities? Speaking of liabilities, you’ll want to be clear about whether you’re taking on any of the seller’s liabilities. This might include things like employee contracts or outstanding debts, and it’s crucial to spell this out.

6. Spell Out the Due Diligence Period This is your chance to dig into the financials, operations, and legal aspects of the business. Specify how long this due diligence period will last and what documents or information the seller will provide. Make sure there’s an exit clause here in case something in due diligence isn’t what you expected.

7. Ask for Exclusivity You probably don’t want the seller shopping the business around while you’re in due diligence, so request an exclusivity period. Be specific about how long this will last and whether it can be extended.

8. Keep It Confidential You don’t want the details of the deal or any business info leaking out. A good LOI will include a confidentiality clause to protect both parties, even if the deal falls through.

9. Lay Out Any Conditions for Closing There are usually conditions that need to be met before closing, like financing approval or regulatory checks. Be sure to mention these so everyone knows what needs to happen before the deal can close.

10. Non-Compete and Employment Agreements If you’re worried about the seller starting up a competing business after the sale, include a non-compete clause. Also, if key employees will stay on, be sure to outline any employment agreements here.

11. Set a Closing Date and Timeline Outline the timeline for wrapping up due diligence, signing the purchase agreement, and closing the deal. Include any deadlines for key milestones.

12. Clarify What’s Binding and What’s Not Although most of the LOI is non-binding, make sure you call out any sections that are legally binding, like confidentiality or exclusivity.

13. Terms for Walking Away Lastly, you want to include terms for terminating the LOI. If something big comes up during due diligence or financing falls through, this section will let either party walk away.

This post was originally published at ericimendelsohn.com .