Acquiring Businesses: The Letter of Intent

Letters of intent (LOI) are an initial agreement between a business buyer and seller. An LOI summarizes transaction terms and conditions that have been negotiated and agreed upon by both parties.

Most LOIs are non-binding and merely serve as an outline of business terms, key business agreement points, and contingencies, before a Definitive Purchase Agreement and other ancillary documents exist.

The following components are most commonly addressed in letters of intent:

Price & Terms
Defines the purchase price, or the method that will be used to determine the purchase price, plus potential price adjustments. It addresses payment terms, including cash, notes, assumption of liabilities, earnouts, etc.

Transaction Structure
Includes a description of the stock purchase or asset purchase, sets forth the parties involved, and whether an individual or a corporate entity is making the purchase.

Assets and Liabilities
States which assets are to be included or excluded, what property or cash will remain the property of the seller, allocation of inventory and fleet vehicles, and any leases and liabilities.

Due Diligence
Outlines the procedures, scope, and schedule buyers must abide by while conducting due diligence, as well as defining the level of disclosure and buyer access to information.

Contingencies & Conditions
Documents terms that must be met for the transaction to proceed, including financing, environmental clearance, due diligence, lease transfer, and the option to transfer/obtain licensing or approvals from regulatory agencies.

Transition / Employment Period
Outlines how long the seller will remain with the business as an employee or consultant, post-sale, including compensation arrangements.

For all of the above points, the LOI works to minimize future misunderstandings and serves as a blueprint for both parties to follow while preparing for the actual transaction.