Buyer's Guide to the Letter of Intent When Purchasing a Business
Author: Elliott Holland
Taking the right steps before and after you draft a letter of intent is critical for a successful deal
Key Takeaways
Get on the same page with the seller
Draft a detailed letter
Present the LOI and be prepared for a counteroffer
Create an organizational system for the due diligence process
Stay on track with your timeline
Get help from an experienced due diligence team focused on your needs
When you're buying a business, the letter of intent outlines the main elements of the transaction. It explains the buyer's and seller's expectations for and obligations to each other. The LOI holds the deal together and guides it to the next step — acquisition.
A clear and detailed letter of intent is critical, and to create one, you must work closely with the seller before you draft the letter. Once both parties sign the letter, you need to move forward with the next steps carefully and competently.
Let these tips guide you along the way.
1. Get on the same page with the seller
For most people, buying a business is the largest investment they will ever make, and it's often the biggest deal that the person on the other side of the table will engage in as well. There's a lot at stake and emotions tend to run high.
An LOI is a meeting of the minds. To ensure it's effective, you need to be on the same page as the seller. Talk with them about all the elements you are going to include in the letter. You may be surprised at how often a buyer thinks they've agreed on something, but the seller claims they've never even discussed the issue.
2. Draft a detailed letter
Before you start drafting the letter, take time to outline the details of the deal and review them carefully to ensure you don't miss anything. You can find a short form template to use in our Downloads section.
Your LOI should include the following:
Sale price: Will you be paying in cash or with a promissory note? Is it a walk-away deal where the seller gets a check and leaves? Or is it an earnout where the seller stays on and must meet certain conditions to earn the rest of the purchase price?
Transaction structure: Are you purchasing just the company's assets? Are you buying all the outstanding shares? Are you merging the target with an existing company?
Employee treatment: Will you keep employees and management teams or bring in your own crew?
Employee options and equity: How are you going to deal with options and equity held by employees? Will you assume them and terminate their agreements or keep these elements in place?
Non-compete: Can the seller go out and start an identical business or will you require them to sign a non-compete agreement for a certain amount of time?
Escrow: Will you put any funds in escrow to protect yourself in case the seller misrepresented anything during your initial conversations?
Disputes: How will you handle disputes? Which jurisdiction will you use?
Deadlines: When do you need to complete key activities? When must you make a final decision on the sale? Does the seller need to complete any actions on a certain timeline?
Exclusivity: To ensure the seller doesn't strike a deal with another buyer before you get a chance to perform due diligence, you need to outline an exclusivity clause.
You should also outline provisions that protect the business you're buying. You don't want to start the process and then have the seller make massive changes to their organization. Ideally, your LOI should state that the seller can't take out new loans, significantly alter customer relationships, distribute dividends, sell assets, or make big purchases without your approval.
3. Present the LOI and be ready for a counteroffer
Before you present the offer, review the letter carefully. Make sure you use conditional language on the elements that are subject to change, such as the purchase price, and binding language for buyer contingencies and the due diligence timeline.
Once you're satisfied with the letter, sign it and present it to the seller. They can sign the letter if they agree with the terms or present a counter-offer.
4. Prepare to be organized during due diligence
After you and the seller sign the letter of intent, it's time to kick off the due diligence process — this is going to involve a lot of documents. Set up an organizational system before the paperwork starts flying in. What are you going to do when you receive emails with a dozen attachments? How about the other hundreds if not thousands of documents you'll receive during this process?
5. Stay on track with your timeline
Your LOI outlined the timeline. Now, you need a strategy to stay on track. You can opt for a simple spreadsheet or a Google calendar, or you can try apps like Basecamp, Trello, Asana, or Slack. The important thing is to outline the tasks you need to accomplish before each milestone.
Remember, at this point, you are still not committed to the deal. Check in regularly during the post-LOI process and make sure you're still interested in going forward. If you discover, for example, that the seller grossly overstated their EBITDA, the business isn't what you expected, or other issues, you can stop the due diligence process and look in another direction.
Buying a business is a huge investment, and you want to ensure it's a smart investment. At Guardian Due Diligence, we have extensive experience in the mergers and acquisitions field, and we focus on investors like you — first-time buyers and self-funded searchers. Let’s talk about your deal and how our services can help you ensure it's the right deal with the optimal terms — schedule a call today.