Writing Your First Letter of Intent

Sc-Sc-Scariest Thing in the World for New Buyers

Halloween is over. You’re probably planning the Big Feast, maybe even shopping for Christmas presents. Putting up the tree?

But… in the back of your mind… the terror… lingers… on…

You’re frozen in your tracks. Your heart is pounding in your chest, throbbing in your ears.

You’ve found a great business. It checks all the boxes.

Profitable? ?

Correct niche? ?

Within your budget? ?

Your deal team is lined up and ready to go. But…

You just can’t pull the trigger. That nasty old Letter of Intent, also known as the LOI, is by far the scariest thing in the world for a first-time business buyer.

But it shouldn’t be. You should be handing them out like Trick-or-Treat candy in the last 10 minutes of the night. It’s not even a binding document.

Wait-what?

That’s right, super important first step, but it’s more of a conversation starter than a legal document. First, I’m not an attorney, so take whatever I say with a grain of salt and talk to someone with actual legal expertise.

Before I share my not-legal-advice and dig into the details of an LOI, let’s put this thing into perspective. Let’s see where the Letter of Intent fits into this whole business buying process. (Are you on the waiting list?)

Once you’ve found a company you’re interested in, the "normal" progression will look something like this:

1. Seller shares their asking price, based on the amount of money they are making from the business, times a multiple of say, 3-5.

2. The two parties have a conversation about how the business runs, building rapport and such. (Get a list of questions to ask here.)

3. The buyer assumes the seller is being accurate with that "profit" number.

4. Buyer makes a non-binding offer based on that information. Ding-ding-ding! This is the Letter of Intent!

4. Seller accepts the offer, or counters with something different.

5. Once an agreement is reached, the Letter of Intent is signed by both parties and the buyer starts due diligence. This is the fun part for me!

6. If everything checks out, the buyer writes up the binding purchase agreement.

7. If the buyer finds discrepancies, they renegotiate the price or terms of the deal.

8. Either party can still walk away.

A couple of notes for clarification.

The buyer wouldn't normally get a valuation before an LOI is written because that will cost several thousand dollars.

Don’t offer something stupid in the LOI when you have no intention of following through with that offer. Rude!

Seller beware if an offer comes in unusually high.

Some parts of the LOI are legally binding. And that’s a good thing. This document usually contains a clause stating that all the private information on the business stays private; it remains confidential. The potential buyer promises not disclose any proprietary information about the targetco, the business being bought. They also promise to not use the info for any purpose except to evaluate the potential acquisition. This clause is binding.

The LOI will usually indicate a time frame during which the seller cannot pursue or entertain any other offers. This is the time during which the buyer performs due diligence. (You can find my free due diligence guide here.) This time period is called exclusivity, and can be 30 days, 60 days, 90 days; whatever the buyer and seller agree on. This clause is also binding. Nothing scary yet, right?

The Letter of Intent should lay out a general idea of how you intend to structure the deal. All the gory details will be defined later, after due diligence, in the binding purchase agreement.

The LOI should contain the following elements:

1. Price you are offering. Yes, an actual price!

2. If you are doing a stock purchase or asset purchase.

3. How the price is to be paid, such as cash, traditional loan, SBA loan, seller financing.

4. If you are offering earnest money, and the conditions under which it will be refunded.

5. What you expect from the seller in regard to training during the transition period.

6. How long you need to complete due diligence, the exclusivity period.

7. The declaration that the seller is taking the company off the market while you perform due diligence.

8. Statement indicating that the LOI is non-binding, except for the previously mentioned clauses.

9. An expiration date for your offer.

(If you would like a sample LOI template, let me know??)

In real life, the scary part of the Letter of Intent is YOU, or your lack of experience. So get some experience. Seriously! Very few people get their first LOI accepted. The last half a dozen business buyers I interviewed shared the fact that they had looked at as many as 200 businesses and submitted 15-20 LOIs, prior to making an actual purchase. One buyer said they looked at 12 companies and submitted two LOIs to make their first business acquisition. Bottom line?

You have to be looking.

You have to be evaluating.

You have to be submitting LOIs.

HIT REPLY: I want to know how many LOIs you’ve submitted!