The Specifics of a Letter of Intent

The Specifics of a Letter of Intent

You have finally identified the right business for you and you are excited to begin the process of putting in an offer. But what, you wonder, does an offer look like? The Letter of Intent (LOI) is the starting point in putting together and submitting a formal offer to acquire a business. The LOI will spell out the terms of the purchase and the transition period and will eventually act as the framework for the Asset Purchase Agreement (i.e the formal offer). The following list are important items to be included within an LOI.

  • Agreement to Buy and Sell between Buyer and Seller. This is basically the legal language that spells out in detail that the Buyer is going to be buying all of the business from the Seller, who the Buyer and Seller are, the name of the specific business, and where the business is located.
  • Payment Terms. This is the section where the Buyer proposes the financial piece of the deal. It will spell out the total Purchase Price to be paid, and how they will structure the deal (i.e. an all cash offer, cash with seller financing, bank financing, etc.).
  • Earnest Money Deposit. The Buyer will put up a good faith deposit upon execution of the LOI. This amount typically ranges from 10% to 20% of the total deal value.
  • Due Diligence Term. The Buyer will want to put forth a term, in days, of how long they would like to perform their due diligence of the business. The due diligence period will begin as soon as the LOI has been fully executed.
  • Timing for Asset Purchase Agreement (APA). This section will mirror the due diligence time frame. And it essentially states that an APA will be drawn up within the due diligence period and executed within that time frame.
  • Closing Date. A definitive closing date should always be included in the LOI.
  • Non-Compete Terms. If there is going to be a non-compete agreement in the deal, this section will spell out the general terms of what is being requested from the Seller by the Buyer.
  • Exclusivity Clause. It is a typical term for the Seller not to entertain additional offers after an LOI has been signed and the Buyer is in due diligence.
  • Contingencies. There are a few common contingencies to plan for when putting together an LOI that include items pertaining to due diligence, bank financing, lease agreement, and assignment, etc.

The above list is not inclusive of all sections to be included within an LOI and as each business is different, each LOI is different. But what this list does do is create a great jumping off point to understand the terms that you will need to be clear on when putting in a future offer.

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Matt Prescott is a Broker with Transworld Business Advisors of Denver. He has been working at Transworld since February of 2016 and teams up with Al Fialkovich to facilitate daily business transactions. Currently, Matt is working with all industries at Transworld and is knowledgeable on anything from restaurant listings to dog daycare businesses. If you are interested in buying or selling a business contact Matt today!