Letter of Intent for business acquisition - Best Practices in 2025
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
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