Buying a Business: What Is the Purpose of a Letter of Intent?
buying business Letter of intent sale of businessWhen you’re considering buying a business, it’s common, and strongly recommended, to begin with a letter of intent (LOI). Although this document is generally not legally binding with respect to completing the purchase itself, it helps lay the foundation for the future agreement between the buyer and the seller.
The primary purpose of the LOI is to ensure that both parties are on the same page. It outlines key elements such as the proposed purchase price, what is included in the sale (for example: shares, equipment, customer base), how the payment would be structured, and the intended timeline. This helps prevent misunderstandings before entering more complex stages, such as due diligence or drafting the final agreement.
One often-overlooked but critical aspect is clearly stating the conditions that must be met before the transaction can proceed. For instance, the buyer may need to secure financing, review specific financial statements, or ensure key staff members will remain with the company. Including these conditions early in the LOI helps avoid disputes or wasted time later in the process if those conditions aren’t met.
Even though the LOI does not typically oblige either party to finalize the transaction, it may contain legally binding clauses. This is often the case with confidentiality agreements (not disclosing the other party’s information) or exclusivity clauses (agreeing not to negotiate with others for a certain period). In short, the letter of intent is a highly useful tool for structuring a transaction from the outset. It shows the buyer’s seriousness, brings clarity to the negotiation process, and protects the interests of both parties. To avoid pitfalls or vague wording, it’s always wise to consult a legal professional before signing.
In short, the letter of intent is a highly useful tool for structuring a transaction from the outset. It shows the buyer’s seriousness, brings clarity to the negotiation process, and protects the interests of both parties. To avoid pitfalls or vague wording, it’s always wise to consult a legal professional before signing.
