- What Is a Letter of Intent?
- Who Writes the Letter of Intent?
- How to Write a Letter of Intent as a Buyer
- How to Evaluate a Letter of Intent as a Seller
- What Happens After You Sign a Letter of Intent?
Before deciding to buy or sell a business, ensure you and the other party are equally committed to closing the deal to avoid disappointment. The best way to establish commitment and lay the ground rules for a transaction is by mutually signing a letter of intent (LOI).
A letter of intent (LOI) is a document declaring the preliminary commitment of one party to do business with another. By drafting or evaluating an LOI, you and the other party can agree on the terms and conditions of your deal before formalizing them in an asset purchase agreement (APA), helping streamline the acquisition process.
Read on to learn more about LOIs, how to draft one as a buyer, and how to evaluate one as a seller.
What Is a Letter of Intent?
In acquisitions, a letter of intent is an offer to buy a business, kicking off the negotiation process as the buyer outlines a purchase price and terms for the seller. If the seller doesn’t agree to the price or terms, they can reject the offer and counter it with a revised LOI that suits their needs.
What Is the Purpose of a Letter of Intent?
A letter of intent sets expectations for an acquisition. The buyer can indicate a price and terms without legally binding themselves or the seller to them. As a result, it’s a convenient way for a seller to express serious interest while allowing plenty of room for negotiations.
Often, the details you hash out in the LOI will transfer directly to the APA, so clarifying those points beforehand prevents surprises or major changes when your acquisition closes.
You also establish trust with the other party by entering into certain binding provisions, like a non-disclosure agreement (NDA – a legal contract that governs the exchange of information between you and a third party) or a no-shop or exclusivity clause (a provision that prevents the seller from speaking to or negotiating with other buyers once they’ve accepted an LOI).
If you agree to keep the details confidential and only negotiate with each other post-signing, you’ll feel more comfortable entering into a legally-binding contract later.
Who Writes the Letter of Intent?
Sometimes, a broker or legal team will draft an LOI for buyers to express interest in acquiring a business. But if a seller lists their startup on Acquire.com, buyers can use our free LOI Builder to draft an offer in less than five minutes.
Not all buyers are legal experts, so using our LOI builder eliminates the stress and uncertainty of drafting the letter of intent and reduces a potentially hefty attorney bill. The Builder prefills the startup’s details and integrates the LOI seamlessly into your Acquire.com workflow.
How to Write a Letter of Intent as a Buyer
Still want to draft your own letter of intent? Here’s an eight-step process on how to do it.
- Greet the person or entity with the right to sell the business by name. Anyone can address an LOI “To whom it may concern,” but you should take the time to address the seller personally. The seller is usually the business’s founder, someone with a majority stake in the company, or another startup entirely. Adding this personal touch will help form a connection with the seller and encourage them to read the rest of the LOI.
- State the purpose of the letter in the opening paragraph. Define the purpose of the letter (acquiring the business) and identify both parties involved (buyer and seller names).
- Identify the terms of the proposed transaction. Name your purchase price, outline how you will pay, and describe the assets and liabilities you want to include or exclude from the acquisition. Make sure you use language like “would, should, and could” rather than “shall or will” to avoid legally binding yourself to the deal.
- Establish a due diligence review. Due diligence starts after both parties sign the LOI. But include a provision in your letter that confirms what documents you should have access to for due diligence (seller’s financial records, intellectual property, and so on).
- Include further agreements, assumptions, and conditions. This is where you’ll see legally binding agreements like non-compete and non-solicitation clauses, escrow agreements, acquisition expenses, and more.
- Decide on Exclusivity Terms and/or a Closing Date. To keep negotiations from dragging on, establish an end date by which the deal must close. You can maintain exclusivity for this period through a no-shop clause. But if exclusivity isn’t important, you can state that the LOI (and impending deal) will expire by a certain date.
- Write a confidentiality clause. Bind both parties to secrecy so you can’t share sensitive company information, and sellers can’t reveal your acquisition strategy.
- State that the agreement is non-binding. Cover your bases and clearly state that this letter of intent to acquire does not constitute an enforceable obligation for either party. Confirm that either party can walk away from the agreement if the LOI (and its revisions) doesn’t meet their requirements.
Learn how to write a letter of intent with our comprehensive guide to LOIs and free LOI template.
How Long Should a Letter of Intent Be?
An ideal letter of intent is usually two to three pages of clear and concise language. Get to the point without missing key information about assets, timelines, and other terms.
Mistakes to Avoid When Writing a Letter of Intent
Review the common mistakes below and check them against your LOI draft. If you’re still unsure if you’ve covered all bases, consult with an attorney.
- Unknowingly making a binding agreement. Review the language in the LOI to see what could be constituted as legally binding in the US court system. As Investopedia says, courts determine if an LOI is legally binding by assessing the “written expressions of intent present in the letter and demonstrative actions taken by both parties after the letter of intent is signed. If the letter is treated as a contract, it could be ruled binding.”
- Not establishing exclusivity. Sellers negotiating with multiple buyers have an advantage and can pull buyers into a bidding war. To avoid this situation, ask that after signing the LOI, the seller commits to working with you only unless the LOI expires.
- Not using precise language. Agreeing to do something in an LOI instead of alluding to that action can impact expectations later. Imprecise language could cause certain assets and liabilities to fall into your lap that you didn’t want or expect. Clarify what you expect to receive from the potential transaction.
Learn what to ask a seller before sending them an LOI from our M&A expert, Paul Kelly.
How to Evaluate a Letter of Intent as a Seller
After the buyer has sent over the initial LOI, scrutinize it to ensure it meets your acquisition goals. Below are some routine questions to ask before accepting and signing an LOI.
- Does the buyer plan to finance through cash or financing?
- Who will take on certain liabilities if it’s an asset sale?
- When does the LOI expire?
- Has the buyer added binding provisions like an NDA, no-shop, non-compete, or non-solicitation clauses?
- Is the buyer or seller responsible for any long-term debt?
- Does the LOI contain an earnout, seller holdback, rollover, or some other condition?
- What must you provide for due diligence?
If the LOI doesn’t meet your criteria or the conditions are too restrictive, reject the LOI and move on to evaluating the next buyer or send revisions back to the first one.
How Serious Is a Letter of Intent?
When selling your business on Acquire.com, you must accept a letter of intent before moving forwards on a deal. Transparently documenting the acquisition process protects you and the buyer from potential disputes or misunderstandings.
But nothing is finalized until you sign the APA. You might receive dozens of LOIs as a seller, and you don’t have to accept any. You can even back out of negotiations midway through because, generally, an LOI isn’t legally binding.
The only provisions you must heed are legally-binding NDAs, non-competition, non-solicitation, and no-shop clauses. Reneging on those agreements after signing will only result in a headache-inducing lawsuit if you’re not careful.
What Happens After You Sign a Letter of Intent?
After several drafts and revisions of an LOI, you’re ready to sign on the dotted line. You’ve hammered out the details and are ready to move forward on the deal. What’s next?
Buyers will pursue due diligence now, evaluating a company’s cap table, equity grants, intellectual property, and any outstanding disputes. Ensure the company can deliver on its promises, and if you’re acquiring a SaaS company, watch out for red flags like these.
After due diligence has wrapped, you sign an asset purchase agreement (APA) that formalizes the acquisition. Take advantage of our user-friendly APA builder to streamline the drafting process.
Is a Letter of Intent Legally Binding?
A letter of intent is not legally binding. However, it can contain legally binding terms under specific clauses like no-shop, non-disclosure, non-compete, and non-solicitation agreements. Most parties include these provisions to maintain confidentiality throughout the deal process or to prevent employees from leaving the company and taking customers with them. If you’re unsure about the legal wording in an LOI you send or receive, consult an attorney.
Is a Letter of Intent an Offer?
Yes, a letter of intent is a non-binding acquisition offer. But don’t send an LOI to every business you stumble across, otherwise you might gain a reputation as a time-waster. Instead, consider why you’re pursuing this specific startup and how it achieves your acquisition goals. Be prepared to follow through on your offer if your conversations with the seller and initial due diligence go well.
Can I Reject a Letter of Intent?
Yes, you can reject a letter of intent, but tell the buyer why to maintain goodwill and potentially save the deal. Perhaps the asking price was too low, or the terms and conditions were too restrictive. If you still want to negotiate with this buyer, draft a counteroffer and send the revised terms back to them. It might take several rounds of negotiation before you settle on an acceptable offer.
Can I Back Out After Signing a Letter of Intent?
Generally, yes, you can back out of a signed letter of intent. But pay attention to the language used within the letter – the courts could count it as legally binding if the transaction terms are specific and clear. For example, using words like “would” compared to “will” or “shall” allows you more flexibility when walking away from the negotiation. Instead of saying the purchase price will be one million dollars, say the purchase price would be one million dollars. That way, you’re not 100 percent committing to paying that price if you decide to exit the agreement.
And of course, you must adhere to any binding agreements like an NDA, no shop, or non-compete clause included in the LOI.
Does a Letter of Intent Include a Deposit?
No, a letter of intent does not usually include a deposit. Some buyers, as a gesture of good faith or goodwill, include a deposit once the formal sales contract is signed. But the LOI only establishes the preliminary terms of the deal and is non-binding. Since both parties can walk away from an LOI, you shouldn’t put any money down until you negotiate the full agreement.
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