Letter of Intent for business acquisition - Best Practices in 2025

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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:

Common M&A Terms - Glossary for Buyer and Sellers

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

1. 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:

SBA Financing Example

Maximizing Your Success: The Power of Skilled Business Brokers

Selling a business is one of the most important financial decisions an owner can make. Whether you’re ready to retire, move on to a new venture, or simply test the market, a skilled business broker can dramatically increase your chances of success.

Business brokers specialize in guiding owners and buyers through the entire process of selling or acquiring a company. From confidential marketing to due diligence and closing, the broker acts as a trusted advisor to keep the deal moving forward while protecting your interests.

Who Does a Business Broker Represent?

Much like a real estate agent, a business broker typically represents one side of the transaction. In most cases, brokers represent the seller rather than the buyer.

Why? Confidentiality. Unlike selling real estate, advertising a business for sale publicly could damage relationships with employees, customers, vendors, or competitors. A broker’s role is to market the business discreetly and protect sensitive information while finding qualified buyers.

On average, a properly marketed listing generates 60–100 buyer inquiries over 3–12 months. From those, only a small percentage will be serious, financially qualified prospects. A broker’s network, marketing tools, and vetting process help narrow the field efficiently.

When a broker represents the seller of a business, their main responsibility is to identify potential buyers through various marketing channels, such as business for sale websites, digital marketing, and their own network. A typical listing generates 60-100 buyer candidates over the course of the sales process, which can last anywhere from 3-12 months.

Maintaining Confidentiality

Confidentiality is the backbone of a successful sale. A good broker ensures that only serious, pre-qualified buyers gain access to your company’s details.

• Every buyer signs a Non-Disclosure Agreement (NDA).

• Buyers provide background information and proof of financial ability.

• Only then does the broker share a confidential business summary and limited financial data.

This screening process saves time, protects your business, and helps avoid unnecessary disruptions.

All buyers are required to sign a Non-Disclosure Agreement (NDA) and provide background information to the broker. This information helps the broker assess the buyer's experience level and determine if they are a good fit for the business. Once the buyer is approved, they are given a summary of the business and limited financial information to help them determine if the opportunity meets their criteria.

Buyer-Seller Meeting

One of the most pivotal steps in the sales process is the initial meeting between the buyer and seller. This 60–90 minute discussion, held either in person or virtually, allows the buyer to ask questions and understand the story behind the business.

Following this meeting, serious buyers often move toward submitting an offer. At this stage, brokers may also request proof of funds or financing commitments to reassure the seller that the buyer is qualified.

Due Diligence

After an offer is accepted, the transaction enters due diligence—the stage where the buyer “tests” the business.

During this phase:

• Attorneys draft the Asset Purchase Agreement and related documents.

• A secure data room is opened for reviewing tax returns, contracts, leases, payroll, and other critical information.

• The broker coordinates communication, resolves issues, and ensures progress toward closing.

Strong broker management during due diligence can mean the difference between a deal that closes and one that falls apart.

Closing

The final step is closing. If bank or SBA financing is involved, approvals typically take 60–120 days. Transactions that also include real estate may take longer.

The broker works closely with lenders, attorneys, accountants, and both parties to ensure that all documents and conditions are in place for a smooth transfer of ownership.

Why Work with a Business Broker?

 Industry data shows that only 10–20% of businesses sell without a broker. With a broker involved, that number jumps to 25–30% or higher.

A skilled business broker helps you:

• Maintain confidentiality. (

• Attract and qualify serious buyers.

• Negotiate favorable terms and price.

• Manage paperwork and deadlines.

• Keep the deal on track from start to finish.

Ready to Sell Your Business?

Contact Playbook Advisory today for a confidential consultation and learn how we can help you maximize value and successfully navigate the sale process.

📞 (773) 243-1603 | ✉️ info@playbookadvisory.com

 Additional Reading:

7 factors to consider when selling your business?

 When buying a business here are strategies that work

An example of purchasing a business with SBA financing

🌟 Are You Planning to Sell Your Business in 2025? 🌟

As we enter the new year, it's the perfect time to start planning your exit strategy. At Playbook Advisory, we specialize in helping business owners like you achieve successful sales and smooth transitions.

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🔍 Our Approach

1. Valuation - We accurately assess the value of your business to set a competitive and fair market price.

2. Marketing - Our strategic marketing ensures your listing reaches qualified buyers looking to make a substantial investment.

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4. Transition - We support a seamless transition to the new owners, safeguarding the legacy of your hard work.

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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.

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:

1. 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.

2. Drafting: Legal professionals draft the agreement, ensuring all legalities are properly addressed and that the document is binding.

3. 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:

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

Best Practices for Business Buyers When Meeting with Prospective Sellers

Navigating the world of business acquisitions can be a complex process. When a business buyer meets with a prospective seller, preparation and professionalism are essential. Below are some guidelines and best practices for business buyers to consider when preparing for a meeting with a seller.

1. Dress the Part:

• Clothes to Wear: Dressing in professional attire, or in a manner consistent with the industry you're interacting with, is crucial. It not only demonstrates your seriousness but also shows respect for the seller. Avoid overly flashy attire; instead, aim for a polished, neutral, and business-appropriate look.

2. Prepare Thoroughly:

• Do your homework on the business you're considering buying. This includes understanding the industry, the competition, and the company's financials.

3. Respect the Seller's Concerns:

• Confidentiality: Many sellers are concerned about information leaks that could disrupt their business operations. Assure them that all data and discussions will be kept confidential.

• Timeframe: Understand that sellers might be anxious about the length of the buying process. Be transparent about your timeline and intentions.

4. Be Aware of Buyer Concerns:

• Due Diligence: This is your opportunity to deeply understand the business. Ensure that you have access to all necessary records and documents.

• Valuation: Understand how the business is valued and be prepared to negotiate on price if necessary.

• Post-acquisition Plans: Consider how you plan to run the business after acquisition. This can impact negotiations and seller considerations, especially if they care about the business's future direction.

5. Top 10 Questions to Ask:

• Financials: Can I see the last three years of financial statements, including profit and loss, balance sheet, and cash flow?

• Client Contracts: Are there any long-term client contracts in place, and if so, can they be transferred to a new owner?

• Employee Relations: What are the current employee contracts, benefits, and morale? Are there any key employees I should be aware of?

• Business Assets: What assets are included in the sale? This could range from physical assets to intellectual property.

• Liabilities: Are there any outstanding debts, litigations, or potential liabilities that I should be aware of?

• Reason for Selling: Why have you decided to sell the business at this time?

• Market Position: How does the business compare to competitors in the market? What is its unique selling proposition (USP)?

• Growth Opportunities: Where do you see the most significant opportunities for growth or expansion?

• Challenges: What are the most significant challenges the business currently faces?

• Transition Period: Are you willing to stay on for a transition period to help with the handover? If so, for how long?

Meeting with a prospective seller is a significant step in the business buying process. Approach it with diligence, respect, and thoroughness to ensure the best possible outcome for both parties. For more tips and recommendations contact Jim Peddle at president@playbookadvisory.com.

Protecting Your Investment: The Power of Reps and Warranties in M&A

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.

Maximize Your Profit: Why Hiring a Business Broker is a Smart Move!

Selling a business is a complex and time-consuming process that requires expertise and experience to achieve the best possible outcome. This is where hiring a business broker comes into play. By working with a business broker, you can maximize your profit and ensure a smooth and successful sale of your business.

A business broker has the expertise and experience to guide you through the process of selling your business. They have a deep understanding of the market and can help you determine the right price for your business. They also have a large network of potential buyers and can help you find the right buyer for your business. This can save you time and effort compared to trying to find a buyer on your own.

In addition, a business broker can maintain confidentiality during the sales process, protecting your reputation and reducing the risk of confidential information being leaked. They can also handle the legal and regulatory requirements involved in the sale, freeing up your time to focus on running your business.

Finally, business brokers are skilled at negotiating deals and can help you achieve the best possible price for your business. They can also help you navigate any challenges that may arise during the sales process, ensuring a smooth and successful outcome.

Hiring a business broker is a smart move for any business owner looking to sell their business. With their expertise, experience, and connections, a business broker can help you maximize your profit and ensure a smooth and successful sale. If you are thinking about selling your business in 2023 give our office a call to discuss fees, valuations and next steps.

Our office phone is 312-525-9622 or reach us at president@playbookadvisory.com.

AV Media Rental Equipment Leasing & Sales - $2,200,000

Purchase a company that allows you to be a key preferred vendor for Professional Sports teams, Fortune 500 companies, Local and National Media outlets and Social Media influencers.

• Over 10 Year Old Company

• Recurring Revenues

• Proprietary Software for Rentals and Sales

• SBA Pre-qualified

HD Media Equipment Rental Leasing & Sales - The company has over $1.25mm + in inventory/equipment onsite at its showroom facility. The company generates a significant amount of revenue from repeat clients that are well known in Chicago. You will work with Professional and Major League Sports Teams, Universities, and Fortune 500 Corporate clients that rely on the company to provide reliable equipment and gear to produce their media content.

In 2021 the company generated revenues of $1,600,000+ in 2021 and $1,700,000 in 2019 bouncing back from the pandemic 2020 that affected the Rental and AV industry. Contact us to learn more about this listing.

First time offered

Contact Jim Peddle the listing broker to learn more.

Request NDA