How to Write a Letter of Intent to Buy a Business

Introduction

A Letter of Intent (LOI) is a non-binding document that outlines the key terms of your proposed business acquisition. Think of it as a formal handshake — it demonstrates serious interest and establishes the framework for detailed negotiations. A well-crafted LOI moves the process forward efficiently, while a poorly written one can derail a deal before it starts.

What Goes in a Letter of Intent

A comprehensive LOI should include:

1. Purchase price: Your proposed total price for the business
2. Payment structure: How you plan to pay — cash, seller financing, SBA loan, or a combination
3. Assets included: Specify what you're buying (equipment, inventory, intellectual property, customer lists, lease)
4. Due diligence period: Typically 30-90 days after signing the LOI
5. Earnest money deposit: Amount you'll deposit to demonstrate commitment (typically 1-5% of purchase price)
6. Seller's transition assistance: Training period and consulting availability after closing
7. Non-compete agreement: Proposed scope and duration
8. Contingencies: Conditions that must be met (financing approval, lease assignment, satisfactory due diligence)
9. Exclusivity period: Request that the seller not negotiate with other buyers during your due diligence period
10. Proposed closing date: Target timeline for completing the transaction

Key Principles for an Effective LOI

Keep it concise: An LOI should be 2-5 pages. Save the detailed legal language for the Purchase Agreement.

Be specific on price and terms: Vague language like 'approximately' or 'in the range of' creates confusion. State your exact proposed price and payment terms.

Include contingencies: Always include contingencies for financing, due diligence, and lease assignment. These protect your earnest money if something goes wrong.

Request exclusivity: Ask for an exclusive negotiating period (30-60 days) so the seller can't shop your offer to other buyers.

State what's non-binding: Clearly state that the LOI is non-binding except for the exclusivity and confidentiality provisions. This protects both parties.

Show professionalism: A well-written LOI signals that you're a serious, organized buyer. Sloppy or incomplete LOIs raise red flags.

Common LOI Mistakes

• Offering too low: An insultingly low offer wastes everyone's time and may offend the seller. Base your offer on market data and the business's financial performance
• Forgetting contingencies: Without financing and due diligence contingencies, you could lose your earnest money deposit
• Being too rigid: An LOI is a starting point for negotiation. Leave room for compromise
• Skipping the exclusivity clause: Without exclusivity, the seller can use your offer as leverage to negotiate with other buyers
• Not involving your team: Have your attorney and accountant review the LOI before sending it. A few hundred dollars in professional review can save you from costly mistakes
• Delaying too long: If you're interested, submit your LOI promptly. Sellers lose confidence in buyers who take weeks to make an offer

After the LOI is Signed

Once both parties sign the LOI, the process moves into due diligence:

1. Deposit earnest money into an escrow account
2. Begin due diligence immediately — you have a limited time window
3. Apply for financing if you haven't already
4. Engage your attorney to begin drafting the Purchase Agreement
5. Schedule equipment inspections, lease review, and financial analysis

The LOI typically expires after 60-90 days. If due diligence takes longer, you may need to negotiate an extension. Keep communication open with the seller throughout the process.

Final Thoughts

Buying a business is a significant financial and personal commitment. Take your time, do thorough due diligence, and work with experienced professionals — a business broker, attorney, and accountant — to guide you through the process. The right acquisition at the right price can be a life-changing investment.

Browse businesses for sale on BuyThe.Biz to start your search, or visit our Q&A forum to ask questions and get advice from experienced business owners and brokers.