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A letter of intent, or LOI, is a short document that records the main business terms of a purchase before the parties spend money on diligence and a full purchase agreement.
Most of it is not binding, and either side can still walk away. But once it is signed, its terms are hard to reopen, and the side that tries usually loses goodwill or leverage. That makes the letter of intent the least expensive place to get the important points right.
Our article on binding terms and earnest money in a letter of intent covers the questions buyers face most often.
What a Strong Letter of Intent Covers
Price and Payment
Cash at closing, any seller note or holdback, and any working capital adjustment.
Structure
An asset purchase or a purchase of the company itself.
Diligence and Timing
How long diligence lasts and the target closing date.
Exclusivity
Whether, and for how long, the seller stops talking with other buyers.
Seller Transition
How long the seller stays to help, and on what terms.
Non-compete
How long it lasts and where it applies.
Conditions
Financing, landlord consent, license transfers and anything else that must happen before closing.
Representing Either Side
For buyers, the letter of intent is the chance to lock in structure, exclusivity and the transition terms before spending money on diligence. For sellers, it is the chance to settle the price, how it is paid and how much risk the seller will carry after closing, while there are still other buyers interested.
Where the Letter of Intent Fits
First Conversations
The buyer signs a nondisclosure agreement and reviews the business at a high level.
Offer and Negotiation
The buyer proposes terms, and the parties trade drafts until the main points are settled.
Signing
Binding terms, such as confidentiality and exclusivity, take effect.
Diligence
The buyer investigates the business within the time the letter allows.
Purchase Agreement
The final agreement is drafted from the terms in the letter.
Frequently Asked Questions
Have a question that isn't answered here? Call us at (817) 631-8842 or send a message.
Ask a QuestionWho usually drafts the letter of intent?
The buyer usually prepares the first draft, often with help from the broker. Sellers should still have an attorney review it before signing, because terms left out of the letter are harder to win later.
Can the price change after the letter of intent is signed?
Yes. The price in a letter of intent assumes that diligence will confirm what the seller has described. If diligence finds lower earnings, missing assets or unexpected liabilities, buyers often ask to lower the price or change how it is paid. A clear working capital target and a clear list of what is being bought make those conversations easier.
How detailed should a letter of intent be?
Detailed enough that the purchase agreement holds no surprises. Price, structure, seller financing, the seller's transition period and the non-compete should all be spelled out. Leaving them vague saves time at the start and usually costs more in negotiation later.
Is a letter of intent the same as a term sheet?
They serve the same purpose. In business acquisitions the document is usually called a letter of intent, while startup financings and some larger deals use a term sheet. Either way, it records the agreed terms before the final documents are drafted.
More in Business Acquisitions
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- Buying a BusinessStructure, diligence, negotiation and closing for buyers.Learn More
- Selling a BusinessPreparation, negotiation and closing for owners selling their companies.Learn More
- Asset PurchasesBuying or selling a company's assets while the seller keeps the entity.Learn More
- Stock PurchasesBuying a corporation's shares, with its contracts and its history intact.Learn More
- Membership Interest PurchasesBuying an LLC's ownership under a membership interest purchase agreement.Learn More
- Partner BuyoutsBuying out a co-owner, or selling your stake, on clear terms.Learn More
- SBA-Financed AcquisitionsPurchase agreements and closings built around SBA 7(a) lender requirements.Learn More
- Seller FinancingSeller notes with clear payment terms, security and remedies for both sides.Learn More
- Earn-OutsContingent price terms defined clearly enough to measure, report and pay.Learn More
- Rollover EquitySellers reinvesting in the buyer, on terms that protect the stake they keep.Learn More
- Selling to Private EquityRepresenting owners who sell to private equity firms and PE-backed platforms.Learn More
- Search Funds and SponsorsVehicles, investor terms and acquisitions for searchers and independent sponsors.Learn More
- Franchise ResalesBuying or selling an existing franchise location, with the franchisor's approval.Learn More
- Due DiligenceFinding the legal issues in a business before the buyer owns them.Learn More
- Purchase AgreementsThe negotiated terms that decide who carries the risk in a business sale.Learn More
- Closing an AcquisitionChecklists, payoffs, funds flow and the follow-up that finishes a deal.Learn More
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