Letter of Intent for business acquisition - Best Practices in 2025
“Discover 10 best practices for crafting a Letter of Intent (LOI) for business acquisitions. Our expert guide helps buyers and sellers navigate M&A with a clear, non-binding LOI. Download our free LOI checklist today!"
With over 14 years of experience, our business sales and transaction team has handled diverse M&A engagements. This article explores key challenges buyers and sellers face during business acquisitions and explains how a well-crafted Letter of Intent (LOI) streamlines the process for both parties.
Further Reading:
What is a Letter of Intent (LOI)?
An LOI is typically a non-binding document that outlines the key terms of an M&A transaction. While it allows buyers flexibility to withdraw during due diligence, it establishes a framework for negotiations and signals a moral commitment to proceed in good faith. Though concise—often just a few pages—an LOI is used before drafting a formal purchase agreement to identify deal breakers and clarify expectations.
Is the Letter of Intent - Binding or Non-binding?
The letter of intent should clearly state that it is non-binding, except for sections that are expressly designated as binding. Many LOI's create confusion because they are stated to be letters of intent only, but then are written as if they are binding agreements. Commonly only a few of the sections are designated as binding, such as exclusivity, confidentiality and obligation to negotiate.
Best Practices for Drafting an LOI
Settle key deal terms early in the LOI
Sellers benefit from locking in key terms, such as price, in the LOI, while buyers may prefer flexibility to adjust terms based on due diligence findings. Striking a balance is key: agree on terms contingent on due diligence to avoid vague agreements that could unravel later. Over-negotiating minor details (e.g., net working capital or warranties) in smaller deals (under $2M) can lead to early burnout, so prioritize simplicity.
2. Address Price
Sellers prefer a fixed price in the LOI, while buyers may propose a price range or formula based on due diligence outcomes. Clearly state the valuation method (e.g., “3x the average of the past three years of Seller’s Discretionary Earnings (SDE)”) to ensure transparency.
3. Define Assets and Liabilities
Specify major assets included in the sale, liabilities assumed by the buyer, and any assets excluded. For stock sales, identify assets or liabilities to be removed before closing. Consider addressing purchase price allocation for tax purposes, as buyers favor depreciable assets, while sellers prefer allocating to goodwill to minimize tax recapture.
4. Outline Financing Terms
If the deal involves financing, include:
Whether the buyer is securing third-party financing (e.g., SBA loans) and contingencies.
Details of any seller note, including terms or bank requirements (e.g., standby note).
Buyer’s equity contribution (typically 10-25% of the purchase price).
Name and contact of the financing institution and proof of pre-qualification.
Example Resource: SBA Financing Example
5. Establish an Exclusivity Period
Buyers often request an exclusivity period (45-120 days) to prevent sellers from negotiating with other parties during due diligence. Sellers should only agree if confident in the buyer’s commitment, as exclusivity removes the business from the market and may weaken leverage with other potential buyers if negotiations fail.
6. Ensure Confidentiality
Include a confidentiality clause (or reference a separate non-disclosure agreement) to protect sensitive information shared during due diligence. Specify that confidential data can only be used to evaluate and complete the transaction.
7. Address Representations and Warranties
While a comprehensive list of representations and warranties isn’t necessary in the LOI, include critical ones the buyer deems essential. Specify that the list is non-exhaustive and address key post-closing terms, such as survival periods, indemnification caps, thresholds, or carve-outs.
8. Define Closing Conditions
List key conditions for closing, such as obtaining government or third-party consents, non-compete agreements, or financing approval. Avoid exhaustive lists but ensure critical requirements are clear.
9. Consider a Termination Fee or Deposit
Buyers may request a breakup fee to cover due diligence costs if the seller withdraws. Sellers may require a refundable deposit upon signing the LOI or purchase agreement to ensure buyer commitment.
10. Address Post-Closing Obligations
Define post-closing terms, including:
Real Estate: Specify whether the buyer is leasing or purchasing property and outline terms.
Non-Compete Agreements: Detail scope, duration, and conditions.
Training and Transition: Clarify the seller’s role, duration, and compensation (e.g., hourly rate).
Due Diligence Milestones: Set deadlines to keep the process on track and minimize legal costs.
LOI Checklist for Buyers and Sellers
Below is a streamlined checklist to ensure all critical elements are addressed in the LOI. For a downloadable version, contact us at president@playbookadvisory.com
General Information
Identify both parties (full legal names and contact information).
Define the scope of the transaction.
Specify the date and location of the LOI.
Terms of the Agreement
Price and Payment Terms:
Agree on a purchase price, range, or formula.
Specify cash paid at closing and any deferred payments or earn-outs.
Assets and Liabilities:
List major assets included and liabilities assumed.
Identify excluded assets.
Outline preliminary purchase price allocation for tax purposes.
Financing:
Detail financing terms (e.g., third-party loans or seller note).
Note contingencies and provide proof of pre-qualification.
Clarify equity contribution and any bank requirements.
Exclusivity Period:
Define duration (e.g., 45-120 days).
Specify terms and conditions.
Additional Terms
Representations and Warranties:
Include critical representations, noting they are non-exhaustive.
Address post-closing indemnification terms.
Real Estate:
Clarify if real estate is included and whether it’s leased or purchased.
Outline lease or purchase terms.
Non-Compete Agreements:
Specify scope, duration, and conditions.
Training and Transition:
Define the seller’s role, duration, and compensation.
Due Diligence:
List specific requirements (e.g., licenses, customer contracts).
Set milestones and deadlines to maintain efficiency.
Legal and Confidentiality
Include a confidentiality clause or reference an NDA.
Clearly distinguish binding (e.g., exclusivity, confidentiality) and non-binding sections.
Define termination conditions.
List key closing conditions (e.g., consents, financing).
Final Steps
Review the LOI with legal counsel and revise as needed.
Obtain signatures from authorized representatives.
Distribute signed copies to all relevant parties.
Next Steps
A well-drafted LOI sets the stage for a smoother M&A process by aligning expectations and minimizing risks. For questions or assistance with your business sale, contact Jim Peddle at (312) 525-9622 or president@playbookadvisory.com.
Author: Jim Peddle, Business Broker
All Rights Reserved
Other Reading of Interest for Business Buyers:
Do you have partners in your business? A buy-sell agreement is a tool that can save you aggravation when it’s time to sell your business.
Navigating the future of a business with multiple owners can be fraught with uncertainty and potential conflicts, particularly when it comes time to sell. A buy-sell agreement acts as a safety net, ensuring that all owners have a clear and mutual understanding of how a business will be valued, and the terms under which shares can be sold or transferred. This legal document is not just a formality; it's a critical component of business planning that can prevent costly disputes and ensure the stability of the business through major transitions.
The costs of drafting a buy-sell agreement are a prudent investment in the longevity and health of your business. Depending on the complexity, legal fees for a comprehensive agreement typically range from $2,500 to $10,000—a small price to pay for the security and clarity it brings to your business operations. Remember, the absence of a buy-sell agreement can lead to much higher costs down the line, both in financial terms and in lost time and opportunities.
Utilizing a Buy-Sell Agreement in your business…
When selling a business that involves multiple owners, the complexity of the transaction can significantly increase. Without the right structures in place, such sales can easily spiral into conflict, with parties disagreeing over valuations, terms, and even the basic rights to sell or buy. A critical tool to prevent these issues and ensure a smooth transition is a buy-sell agreement. This agreement is not just a legal formality; it's a blueprint that guides all parties through the transaction's complexities, ensuring everyone's interests are safeguarded.
The Pitfalls of Avoiding Early Agreements
Business owners commonly avoid certain agreements when partnering or taking on investors for a business they start up or purchase, and this oversight can be quite costly when it's time to sell the business. Without a clear agreement from the onset, owners find themselves tangled in disputes that can derail the sale of a business they've worked hard to build.
What is a Buy-Sell Agreement?
A buy-sell agreement, also known as a buyout agreement, is a legally binding document between co-owners of a business that controls when owners can sell their interest, who can buy an owner’s interest, and what price will be paid. These agreements are designed to address all potential situations that could affect ownership of the business, such as an owner’s desire to retire, death, or decision to exit the business for other reasons.
Key Components of a Buy-Sell Agreement
The effectiveness of a buy-sell agreement lies in its detail and foresight. Here are some crucial elements that should be included:
Valuation of the Business: The agreement should clearly define how the business is valued in the case of any owner’s exit. This can prevent disputes from arising between remaining and departing owners over fair price determination.
Terms of the Buyout: Conditions under which the buyout will occur and the payment terms should be explicitly stated. This includes setting up financing arrangements if necessary.
Trigger Events: These are predefined circumstances under which the buy-sell agreement would take effect. Common triggers include retirement, death, divorce, and disability among others.
Implementing the Agreement
Drafting and implementing a buy-sell agreement requires careful consideration and often the aid of legal and financial advisors. The process involves:
Negotiation: All parties discuss and negotiate the terms that will be included in the agreement. This stage is crucial for understanding and aligning the interests of all parties involved.
Drafting: Legal professionals draft the agreement, ensuring all legalities are properly addressed and that the document is binding.
Signing: Once drafted and reviewed, all parties sign the agreement, legally binding them to its terms.
The Impact of a Well-Crafted Buy-Sell Agreement
A well-crafted buy-sell agreement not only prevents conflicts but also facilitates a smooth operational transition. For instance, in a scenario where one partner wishes to retire, the agreement clearly outlines the process for buying out their share, ensuring that business operations continue seamlessly without legal hurdles or financial disputes.
Moreover, such agreements provide peace of mind to all business owners, knowing that there is a predetermined path forward should any significant changes occur. It allows business owners to focus on what they do best—running the business—rather than worrying about potential future disputes.
What does a buy-Sell agreement Cost?
The cost of a buy-sell agreement can vary widely depending on several factors, including the complexity of the business structure, the number of parties involved, and the jurisdiction. Here are some typical considerations that affect the cost:
Complexity of the Agreement: More complex agreements that need to account for various scenarios, such as multiple owners, different classes of ownership, and various trigger events, will cost more due to the increased legal work required.
Legal Fees: Attorneys typically charge either a flat fee or by the hour. Hourly rates can range from $150 to $500 or more, depending on the lawyer's experience and location. A flat fee for a simpler agreement might range from $1,000 to $5,000, whereas more complex arrangements could cost more.
Valuation Methodologies: If the agreement requires a business valuation, this can add to the cost. Professional valuations might range from a few thousand dollars to tens of thousands, depending on the size and complexity of the business.
Review and Negotiation: Costs can increase if there is significant negotiation between parties on the terms of the agreement, requiring more time from legal counsel to revise and finalize the document.
State and Local Requirements: Different states may have specific requirements that could complicate the drafting of a buy-sell agreement, potentially leading to higher costs.
For most small to medium-sized businesses, you can generally expect the legal drafting of a buy-sell agreement to cost anywhere from $2,500 to $10,000, though it's wise to budget for the higher end of this range if your business structure is complex or involves multiple parties. It’s always a good idea to get a few quotes from different attorneys to compare prices and services.
Conclusion
A buy-sell agreement is an indispensable tool for any business with multiple owners. It ensures clarity, fairness, and continuity in situations where ownership could change. For anyone contemplating selling a business or restructuring ownership, setting up a buy-sell agreement should be a priority, not an afterthought.
Business owners should always seek the expertise of legal and financial advisors to craft an agreement that suits their specific needs and provides comprehensive coverage for all potential scenarios. With a solid buy-sell agreement in place, you can ensure that the business thrives, even as ownership changes hands.
If you would like to learn more about this please contact Jim Peddle, Business Broker & President at Playbook Advisory Chicago at 312-525-9622 or email president@playbookadvisory.com.
Protecting Your Investment: The Power of Reps and Warranties in M&A
The purpose of reps and warranties is to provide the buyer with assurance that the target company is in good condition and that the buyer is not acquiring any undisclosed liabilities or issues that may negatively impact the company's value. If any of the representations and warranties turn out to be false, the buyer may be entitled to seek damages from the seller.
Reps & Warranties - Legal Agreements
Reps and warranties are a critical component of any merger or acquisition (M&A) transaction. They are representations and promises made by the seller regarding the current state and future performance of the target company, and serve to protect the buyer from any undisclosed liabilities or issues that may arise after the closing of the transaction.
In M&A transactions, the target company's reps and warranties may cover a wide range of topics, including but not limited to financial statements, taxes, contracts, liabilities, intellectual property, compliance with laws and regulations, and the absence of certain events such as pending lawsuits. These representations and warranties are typically outlined in the purchase agreement, which is a legally binding contract between the buyer and seller.
The purpose of reps and warranties is to provide the buyer with assurance that the target company is in good condition and that the buyer is not acquiring any undisclosed liabilities or issues that may negatively impact the company's value. If any of the representations and warranties turn out to be false, the buyer may be entitled to seek damages from the seller.
It is important to note that reps and warranties are not guarantees of future performance. They are simply representations of the target company's current state and conditions, and they do not extend beyond the closing of the transaction. This is why due diligence is a crucial step in the M&A process, as it allows the buyer to thoroughly examine the target company and verify the accuracy of the reps and warranties.
The level of reps and warranties offered by the seller can vary depending on the size and complexity of the transaction, as well as the negotiating power of the buyer and seller. In larger, more complex transactions, the reps and warranties may be more comprehensive, while in smaller transactions they may be less so.
Target Working Capital
In addition to reps and warranties, another important consideration in M&A transactions is target working capital. Target working capital refers to the amount of cash and other liquid assets that a target company has on hand at the time of the transaction. This is an important consideration because it can affect the buyer's ability to operate the company after the transaction is complete.
The target company's working capital is typically calculated by subtracting its current liabilities from its current assets. The buyer and seller will typically negotiate the target working capital amount that should be maintained by the target company after the transaction is complete. This can be an important factor in determining the purchase price of the company, as the buyer may require a higher purchase price if the target company's working capital is lower than expected.
It is important to note that target working capital is not the same as cash on hand. Cash on hand refers to the amount of cash that a company has available at a given time, while target working capital takes into account the company's current liabilities as well as its current assets. This makes target working capital a more comprehensive measure of a company's financial health and its ability to operate after the transaction is complete.
In summary, reps and warranties and target working capital are critical components of any M&A transaction. Reps and warranties provide the buyer with assurance that the target company is in good condition and free from any undisclosed liabilities, while target working capital affects the buyer's ability to operate the company after the transaction is complete. Both reps and warranties and target working capital should be thoroughly reviewed and negotiated as part of the due diligence process in order to ensure a successful M&A transaction.
Why You Need a Mergers and Acquisitions Attorney
Why you need an M&A attorney when buying any business…from the perspective of a business broker.
“Who you engage to handle your legal issues in a business sale is really significant and I often see business owners choose an attorney who doesn’t have the transactional experience required to handle the deal. ”
If you’re the owner of a small business that’s interested in merging, acquiring or being acquired by another business, you need the proper legal support to ensure that you are getting the best deal possible. These transactions are risky, but an experienced mergers and acquisitions attorney will earn their fees by minimizing risk at every stage of the transaction. That’s why your Mergers and Acquisitions Attorney, along with your Business Broker and Accountant (CPA), should be a key player on your team whenever your business changes its structure.
What Can a Mergers and Acquisitions Attorney Do for You?
Your mergers and acquisitions lawyer will thoroughly research the other business so that there are no last-minute surprises. They will conduct the negotiations over price and terms, drafting memorandums of understanding or letters of intent, so that you and the prospective buyer can see if there is a true meeting of the minds. The best mergers and acquisitions attorneys will get you to take off your rose-colored glasses as they explain the risks of the deals and ways to mitigate them. They will review the contracts, such as a purchase agreement, to ensure that they adhere to all federal and state laws. Some deals will require the preparation of confidentiality and non-compete agreements or memorandums of due diligence. They will prepare the company for the transition and advise you about your fiduciary duties and shareholder rights under the new business arrangement.
Mergers and Acquisitions Attorneys - From Start to Finish
Some business owners think that they don’t need to hire a Mergers and Acquisitions attorney until it’s time to close the deal. This would be a serious mistake. The best mergers and acquisitions lawyers come into the process early in order to help answer legal questions for a potential sale of a business. For example, they can explain the different options such as an asset sale vs. stock sale. In addition, tax or debt considerations or human resources issues (wage & overtime disputes) might mean it makes more sense to create a new business entity in a merger, winding down the existing companies. Throughout the process, Mergers and Acquisitions attorneys keep an eye on all of the legal ramifications enabling you to focus on running your business all the way to a successful closing.
To learn more about the benefits of an experienced M&A Attorney contact, Jim Peddle, at 312-525-9622 or by email at president@playbookadvisory.com.
If you are interested in discussing your business with one of our attorney referral partners feel free to reach out to any of the three listed below;
Attorney Recommendations for Buyers & Sellers:
Chicago Area Attorneys:
Outside Chicago:
Contact Jim Peddle for Attorney recommendations outside Chicago
Other Reading:
"Navigating the Pitfalls: Overcoming Common Challenges When Selling Your Business"
Selling a business is a significant decision that requires careful consideration and preparation. To ensure a smooth and successful transaction, it's essential to review and address several key issues beforehand. Here are some of the most critical factors that business owners need to review before selling their business.
Financial Health: The financial health of your business is a critical factor that potential buyers will consider. Review your financial statements and make any necessary adjustments to improve your business's overall financial performance. This could include reducing expenses, increasing sales, and improving cash flow.
Legal Matters: Before selling your business, you should review all legal documents and contracts, including those related to taxes, employment, and intellectual property. Ensure that all legal matters are in order to minimize any potential liabilities for the buyer.
Market Position: Evaluate your business's market position and understand your competition. What sets your business apart from others? Understanding your strengths and weaknesses will help you make informed decisions during negotiations with potential buyers.
Business Valuation: A business valuation is a crucial component of the selling process. A professional business valuation will help you determine the fair market value of your business and assist you in negotiating a fair price with potential buyers.
Employee Considerations: Your employees are a significant asset to your business. Consider their future and whether you will be able to retain key employees post-sale. If not, this could impact the value of your business and the buyer's interest.
Exit Strategy: Develop an exit strategy that aligns with your goals and objectives. This may include finding a suitable buyer, negotiating a fair price, and ensuring a smooth transition of ownership.
Due Diligence: Be prepared for the due diligence process, which is when potential buyers will review all aspects of your business to determine if it is a good investment. This includes reviewing financial statements, contracts, and legal documents.
In conclusion, selling a business is a complex process that requires careful preparation. By reviewing these key issues, you can ensure a successful transaction and maximize the value of your business. If you are unsure about any aspect of the selling process, consider seeking the assistance of a professional business broker. They can provide valuable advice and support throughout the process.
Complete an Internal Legal Review or Audit:
Is the Company in Good Standing; Confirm the company is in good standing (Illinois: https://www.ilsos.gov/corporatellc/) in all states where they do business. If your business has a physical presence in an outside state, you are required to register for a “Certificate of Authority.” Failure to do so will cause the forfeiture of certain rights and may result in costly retroactive penalties.
Business Records: Having good records will help to eliminate any opportunity for prospective buyers to seek a reduction of the purchase price after a Letter of Intent (LOI) is executed.
Business and Professional Licenses:
Check the status of all required licenses.
If licenses are found to be not current - file for reinstatement
Employee Relations:
Background and credit checks permissible with written consent.
Workers must be properly classified as employees vs. independent contractors.
I-9 immigration compliance for all current employees.
Overtime pay required for all non-management employees
Appraisal of Business: Independent appraisal will educate sellers about the worth of business.
Note - In our opinion, this is only relevant for those companies greater than $10mm in annual revenues.
Disclaimer: Business owners are highly encouraged to seek out professional legal representation prior to listing a business for sale.