Letter of Intent to Purchase Business

Types of Letter of Intent to Acquire Business

Either party might decide to construct a short or a long letter of intent, depending on how many details they want to outline in the letter.

Long letters of intent are drafted more thoroughly and are more comprehensive. One of the advantages is that some issues that might arise in regards to the deal can be solved early on, which helps eliminate the need to pay legal fees and involve management efforts. It also helps save time as prevention of significant issues helps complete business purchase agreements faster and easier. Another important thing is that some problems might turn out to be overpowering, which is why it is better for both parties to learn that early and avoid terminating the negotiation process at the point when it will bring a lot of damage to both the seller and buyer.

Short letters of intent generally touch on only the most important details such as purchase price and some other terms. Its undeniable advantage is letting the parties hold negotiations quicker than with a long form. But the resolution of significant issues will happen later on which might result in extra legal fees and efforts for both sides.

Standard Contents of a Letter of Intent to Acquire Business

A letter of intent to acquire a business can have a different length, which is why contents might differ as well. But what will be most likely included in a LOI is:

1. The purchase price and payment method (might be cash, promissory notes, part of the stock, the entire stock, etc.) and any adjustments to the price (transaction fees, other expenses, etc.)
2. Type of the transaction (it might be the acquisition of assets, all the shares, or a junction)
3. Period of due diligence process (due diligence is the process of reviewing all of the available data in regards to that business entity in question)
4. Period for coming up with the terms of the business deal
5. The need for usage of escrow accounts (for the purpose of securing the indemnification duties of the seller)
6. Period of exclusivity (it is the term for which the seller cannot involve anyone else other than the prospective buyer in the sale of their business; generally it is a one-two months period)
7. Access to the information provided by the seller (the company’s employees, books, records, etc.)
8. Primary warranties from the seller
9. Any pieces of the purchase price paid to the most important employees to retain them
10. The way of treating the company’s employees and their equity
11. Activities of the buying party that fall under the category of prohibited before the closing date of the business deal
12. The need for the consent to the contracts of the seller from any third party
13. The measures that need to be taken by both parties to keep the transaction confidential (including a non-disclosure agreement)
14. Provision about the indemnification of the seller’s board of directors, officers, and other members of the company and indemnification by the company’s shareholders
15. Terms of the closure agreed upon by the parties in a business deal
16. The need for any non-compete/non-solicit contracts
17. The terms of the agreement termination
18. The obligation of the parties to negotiate in good faith
19. The governing law and ways of dispute resolution between parties
20. Binding effect (in the majority of cases, the parties will decide to make the letter non-binding, as both of them wouldn’t want to be bound to conclude a transaction; it is especially true for short letters of intent)

If you want to see how all these provisions should be outlined in a letter of intent, use our free letter of intent template.

Benefits of a Letter of Intent to Acquire Business for the Buyer

The buyer will most likely want the letter of intent to be short, especially if they offer a lot of benefits for the seller. Such a letter will provide the buying party with a long exclusivity period, letting them discuss in detail the purchase or merger agreement. They will generally agree to first perform due diligence before agreeing to all key terms of the letter. However, the parties might also decide that the buyer agrees to the key terms, and if any problems arise throughout the due diligence period, the parties will renegotiate certain provisions.

Some situations might call for a detailed letter of intent, which will help the buyer spend less money and management resources on the transaction that might not be completed.

Benefits of a Letter of Intent to Acquire Business for the Seller

From the seller’s perspective, the company is interested in making the letter of intent as detailed as possible. It is connected with the fact that when the parties sign the letter of intent, the exclusivity period is granted to the buying party, which means they get the advantage in the situation. For the seller, it might be considered as a “lock-up” as they will be unable to talk to other buyers. This is why they would want to think twice and get the fullest picture of the deal before signing the letter.

As well as that, making a comprehensive letter of intent makes it easier to hold the negotiations of the purchase agreement successfully.

How to Fill out a Business Purchase Letter of Intent?

As we have mentioned, the letter of intent to acquire a business might have a short and long form. The example presented below might be considered the long form of the letter.

Step 1 – Effective date and subject

The LOI should start with the date of the letter and the purpose of its creation. The paragraph should tell that this letter is a basis for the construction of a formal agreement agreed upon between the parties.

Step 2  – Parties and business entity

Next, the names of the parties should be provided along with the name of the business entity to be sold.

Step 3  – Purchase price

The price for the business should be mentioned both in numbers and in words. The section might also indicate that the entire ownership of the business will go to the buying party (or another option if the parties agree so).

Step 4 – Real estate

The next piece of information to include in the LOI is the location and legal description of the real estate that belongs to the business entity. The purchase price of the property should be included in numbers and in words as well.

Step 5 – Moment of payment 

The next section should tell when the price for the business will be paid. Methods might not be mentioned as they will be included in a more comprehensive business purchase agreement.

Step 6 – Binding effect

The LOI should explicitly tell whether it is legally binding or not. If it is legally binding, it will entail all the legal consequences of breaching its terms. If it is not, the buyer and seller will not be bound by the LOI.

If the parties chose to make the LOI legally binding, they should include the provision that would say that there is no need to create a formal agreement in the future.

Step 7 – Bank accounts

The provision should state that the seller ensures the operation of the needed bank accounts and with this purpose leaves a certain amount of money across all the accounts.

Step 8 – Actions of the seller

The paragraph is meant to put an obligation on the seller to take actions in the best interest of the business during the purchase process and don’t do anything that could disrupt the normal operation of the company.

There might also be a sentence that this provision is in force after the closure of the transaction as well.

Step 9 – Closure of the deal

The section should state what constitutes the closing of the transaction. The closing date might be after the signing of the formal contract (for non-binding LOI) or after meeting the terms of the LOI.

Step 10 – Costs of the closure

The paragraph is devised to indicate who will pay the closing costs. The buyer and seller might divide them, or it might be the full responsibility of the buyer.

Step 11 – Termination

The provision should specify the date when the letter terminates in case the buyer and seller don’t sign a formal contract within a certain period after the date of signing of the letter.

Step 12 – Access to data about the business

The paragraph should state that once the letter is executed, the buyer along with the third parties authorized by them should be able to access information about the purchased company. It might also state that the buyer takes an obligation to keep the information confidential.

Step 13 – Conditions

The section might state that the buyer has an obligation to enter into a formal agreement within the specified period of time; the buyer must review and approve all the materials provided by the seller throughout the due diligence process; the seller has the right to perform due diligence in the ways and time period necessary for them; the buyer has the right to hold negotiations with any third party regarding the acquisition of the business within due diligence.

Step 14 – Confidentiality

Another piece of information that should be in a LOI is a statement that details of the transaction discussed by the parties fall under the category of confidential, and only a limited circle of people can access the information. The information can be released only with the consent of the owner or in situations required by law.

Step 15 – Good faith negotiations

Here, the parties should state that they agree to negotiate in good faith and take an obligation to act truthfully and diligently during the purchase process.

Step 16 – Exclusivity

The seller and buyer agree that after they sign the letter of intent, they will not hold negotiations with any other party. It might be irrelevant only in cases when either party has any existing contracts in place.

Step 17 – Currency and governing law

The currency agreed upon by the parties and the law they will deem governing should be included here.

Step 18 – Severability clause

The next clause should tell that if any provision in the document is invalid, it doesn’t affect the validity of other provisions of the letter.

Step 19 – Counterparts and electronic means

The second to last paragraph might state that the letter of intent can be drafted in several copies that will have the same legal effect. The provision might also tell what can be considered the delivery of the letter.

Step 20 – Signatures

The letter should end with the signature of the parties. Date of signing and print names of both seller and buyer are needed here.

If you want to get a perfect business purchase letter of intent template, use our online document builder! You will be offered a set of questions that describe the business that is about to be sold/purchased. Just take up to ten minutes of your time to carefully insert the information, and voila – your customized letter of intent template is ready.

Sample Letter of Intent to Purchase Business

From: Ginger Bread
345 Gartner Ave.
Austin, TX 78723
April 4, 2021

To: Sonya Cap
53 Greenview Drive
Calliham, TX 78007

Re: Intent to Purchase a Business Entity

This letter of intent to purchase business represents basic terms agreed upon by Buyer and Seller:
1. The Buyer: Ginger Bread.
2. The Seller: Sonya Cap.
3. The Business: “Hello, LLC.”
4. Purchase Price: The Buyer will enter into an agreement with the Seller for $100,000 (one hundred thousand dollars).
5. Real Estate: This Letter of Intent does not include real estate.
6. Payment: The Purchase Price should be paid in the following manner:
Deposit in the amount of $10,000 (ten thousand dollars) is paid upon the execution of the Business Purchase Agreement; the remaining payment is made at Closing.
7. Financing: the Buyer has made it known that this Letter of Intent is not conditional on their ability to obtain financing.
8. Closing: Closing is the act of closing the transaction where the Seller exchanges the Business for the Purchase Price. The Closing should occur within the agreed timeframe following the formal agreement between the Parties.
10. Closing Costs. All costs associated with the Closing shall be the responsibility of both parties, each bearing their own expenses.
11. Binding effect: This Letter of Intent should not be considered binding. The terms outlined here are solely for the purposes of reaching a later agreement in the future, of which Buyer and the Seller are not bound.
12. Termination: This Letter of Intent will terminate if there has not been a formal agreement signed within ten (10) days from the Effective Date.
13. Acceptance. If you agree to the above-mentioned terms, please sign this Letter of Intent and return the duplicate copy within five (5) business days after the delivery.

Buyer: Ginger Bread                                                             Dated: 04/04/2021

Seller: Sonya Cap                                                                 Dated: