Received a Letter of Intent to Buy Your Business? Read Beyond the Price

Received a Letter of Intent to buy your business?

Seeing an attractive purchase price can naturally draw most of the attention.

But a Letter of Intent, often called an LOI, can contain much more than a headline number.

Before moving deeper into a transaction, a seller should understand what the buyer is actually proposing.

What Is a Letter of Intent?

A Letter of Intent generally outlines important proposed terms for a potential business acquisition before the parties move further into due diligence and final transaction documentation.

The exact structure and legal effect of an LOI vary by transaction.

Some provisions may be intended as preliminary, while others may create obligations depending on how the document is written. Qualified legal counsel should review the actual document.

Start With the Purchase Price — Then Keep Reading

The proposed price matters, but sellers should understand how that price is expected to be paid.

A transaction may involve:

Cash at closing
Buyer financing
Seller financing
Deferred payments
Contingent payments
Other transaction-specific structures

Two proposals with the same headline price can therefore represent very different financial outcomes.

Understand What Is Being Purchased

The LOI may address how the proposed transaction is expected to be structured.

Depending on the deal, the buyer may be proposing to purchase certain business assets, ownership interests or another defined package of rights and obligations.

Sellers should understand exactly what is contemplated before assuming that two offers are directly comparable.

Look at Financing Conditions

If the buyer expects to use acquisition financing, the proposed transaction may depend partly on obtaining that financing.

A seller should understand whether financing is part of the proposal and whether the buyer’s financing process could affect timing or closing certainty.

Financing availability is never automatic merely because an LOI has been signed.

Review the Due Diligence Expectations

An LOI often precedes a more detailed due diligence process.

The buyer may request financial, operational, legal, customer, employee, contract or other business information.

The seller should understand:

What information may be requested
How long the review is expected to take
How sensitive information will be handled
Who will have access to the information

Understand Any Exclusivity Provision

Some proposed transactions may include a period during which the seller agrees not to pursue other buyers or competing offers.

Because an exclusivity provision can affect the seller’s ability to engage with other parties, its scope and duration deserve careful attention.

Legal counsel should review the specific language and obligations.

Pay Attention to Transition Expectations

The buyer may expect the seller to remain involved after closing.

That could involve customer introductions, employee transition, training, operational support or other responsibilities.

A seller should understand how much post-closing involvement is being proposed and whether it fits the owner’s own plans.

Look at Timing and Closing Conditions

The LOI may also outline an expected timeline and conditions that need to be satisfied before closing.

Those conditions can vary significantly from one transaction to another.

A target closing date should therefore not be treated as a guaranteed closing date.

An LOI Is an Important Step — Not the Finish Line

A Letter of Intent can indicate that a buyer is serious enough to put proposed transaction terms in writing.

But substantial work may still remain, including:

Due diligence
Financing
Negotiation
Legal documentation
Closing conditions
Transition planning

The transaction can still change or fail to close.

Evaluate the Complete Proposal

When reviewing an LOI, sellers can benefit from looking beyond one number.

Consider the complete proposed transaction:

Price
Payment structure
Financing
Conditions
Due diligence
Exclusivity
Timing
Seller transition

EIN Business Brokers provides a starting point for business owners considering a sale and navigating the transaction process.

Business valuations, proposed terms, financing, legal obligations, negotiations and closing outcomes vary by transaction. An LOI, offer or buyer discussion does not guarantee a completed sale. Sellers should obtain appropriate legal, tax and accounting advice for their specific transaction.

Frequently Asked Questions

Does signing a Letter of Intent mean my business is sold?

No. An LOI can be an important transaction milestone, but due diligence, financing, negotiation, final agreements and other closing conditions may still remain.

Should I look at more than the purchase price in an LOI?

Yes. Sellers may also need to consider payment structure, financing conditions, due diligence, timing, exclusivity, transition requirements and other proposed terms.

Is every part of a Letter of Intent legally binding?

Not necessarily. The legal effect of individual provisions depends on the specific document and applicable law. Sellers should have qualified legal counsel review the LOI before signing.