Getting a Letter of Intent Right
A letter of intent for a business purchase is one of those documents everyone treats like it is optional paperwork until they actually need it. It sets out the basic terms of a deal before anyone spends money on due diligence or legal fees. It is not usually binding, which is the whole point. You are saying here is what I think we should do, let us figure out if we can actually make it work. I have seen a lot of these things get written up by people who copy templates off the internet. The problem is most templates leave out the clauses that matter when things go sideways. Here is a version that actually reflects how this plays out in practice. The letter should open with the buyer's name and the seller's name, along with the date. Then state the property being discussed. This sounds obvious but I have dealt with LOIs where the description of the asset was so vague it caused a three-week delay later on because the seller thought one thing was included and the buyer assumed something else entirely.
Proposed Purchase Price and Payment Terms: State the price you are willing to pay. Be specific. If it is an earn-out arrangement, describe how it works. If it involves seller financing, include the approximate rate and term. Buyers often leave this section fuzzy because they are testing the waters, but vague pricing turns sellers off immediately. I once worked a deal where the LOI said "price to be negotiated based on due diligence results." The seller walked away. Three weeks later, the buyer came back offering the exact same price the seller wanted, but trust was already gone. Assets and Liabilities Included: List what is being purchased. Inventory, equipment, customer lists, intellectual property, goodwill. Also state what liabilities the buyer is assuming. A clean sweep approach gets you nowhere with experienced sellers. They know you cannot buy a business without touching some of its existing obligations. Due Diligence Period: This is where most LOIs get weak. Specify the time frame. Thirty to forty-five days is standard for small to mid-market businesses. Longer than that and the seller loses momentum. Shorter than that and you are flying blind. Include the scope: financial records, customer contracts, lease agreements, employee status, environmental issues, pending litigation. I learned the hard way about scope creep. One LOI I drafted only listed "financial statements" for due diligence. The buyer's lawyer later demanded access to vendor contracts, employee personnel files, and tax returns from five years back. We had to renegotiate the entire LOI before the seller would agree, which cost us two weeks and nearly killed the deal.
Exclusivity Clause: This is the part buyers need most and sellers hate. An exclusivity clause prevents the seller from shopping the deal around while you do your due diligence. Typically runs thirty to sixty days. Without it, you spend money on investigations only to find the seller accepted a better offer from someone else. On the flip side, sellers rightfully push back on long exclusivity periods. If you ask for ninety days with no financial commitment behind it, you look like a time waster. Confidentiality: Standard non-disclosure language. Both parties keep the terms of the LOI and all information exchanged during due diligence private. This protects both sides. Buyers don't want their investment strategy leaking. Sellers don't want employees or customers finding out from a gossip chain. Binding vs Non-Binding Language: This needs to be explicit. States that the LOI is not a binding contract except for certain provisions like confidentiality and exclusivity. The actual purchase agreement will be a separate document. If you don't make this clear, some states and some judges will treat the LOI as an enforceable contract anyway, and that can lock you in on unfavorable terms you never intended.
Get the Full Details
Closing Conditions: What needs to happen before the deal actually closes? Financing approval, regulatory clearance, board approval if either party is a corporation, key employee retention agreements. Listing these shows you are thinking ahead instead of just throwing a price number at the wall. Expiration Date: Set one. If the seller hasn't accepted by a certain date, the LOI is dead. This prevents ambiguity. I've seen LOIs linger for months with no action, creating false hope on both sides and keeping the seller from pursuing other opportunities. Put a date on it and mean it.
How to Use This Properly
Send the LOI after you have had preliminary conversations with the seller and you feel confident enough to invest in real due diligence. Do not send it as your first move. You haven't established anything at that point. Send it when you are ready to put some skin in the game without yet committing to the full purchase. Get a lawyer to review it before you sign. Every single time. The template language might look fine on paper but there are jurisdictional differences and industry-specific nuances that a template writer who has never handled a dental practice acquisition or a manufacturing business sale won't catch. I spent twelve hundred dollars on a lawyer to review an LOI once. Saved me about forty thousand in potential litigation and three months of wasted time. Worth every penny.
Where This Approach Falls Apart
LOIs are not useful when the deal is straightforward enough to close quickly. A simple asset sale between friends, a business being sold with no debt and clear financials, a very small transaction where both parties trust each other. The LOI adds friction in those situations. It slows things down and increases legal costs. For deals under fifty thousand dollars, skipping the LOI and going straight to a purchase agreement is often the smarter move. They also don't work well when one side has significantly more information than the other. If the seller knows the business is about to lose its biggest client and buries that in the documentation, the LOI gives them cover. The buyer is locked into exclusivity while the seller sits on bad information. Always pair the LOI with aggressive due diligence, not blind faith in the document itself.
Key Takeaways
- Specify everything. Vague LOIs create vague deals and messy disputes later.
- Keep exclusivity reasonable. Sixty days max unless there is a compelling reason.
- Make binding and non-binding provisions crystal clear.
- Set an expiration date. Never leave an LOI open-ended.
- Have a lawyer review it. The cost is minor compared to what goes wrong without one.
