What Is a Letter of Intent and What Should It Include?
A Letter of Intent (LOI) is a document that outlines the basic terms of a proposed business sale before the parties enter into a formal purchase agreement. It’s a major milestone — it signals that a buyer is serious and creates a framework for moving forward. Understanding what belongs in an LOI and what to negotiate is essential for sellers.
Is an LOI Binding?
Most LOIs are non-binding on the purchase price and terms — they represent the parties’ intent to negotiate in good faith rather than a firm commitment to close. However, certain provisions within an LOI are typically binding, including the exclusivity clause, confidentiality obligations, and sometimes a deposit requirement.
Key Elements Every LOI Should Address
Purchase price and structure: How much will be paid, and how — all cash at closing, seller financing, earnouts, or a combination?
Deal structure: Asset sale or stock/membership interest sale?
What is included: Which assets, inventory, equipment, and liabilities are included in the transaction?
Earnout provisions: If a portion of the price is contingent on future performance, the earnout metrics and timeframe should be specified.
Due diligence period: How long does the buyer have to complete their investigation?
Exclusivity: Most LOIs include a period (30–90 days) during which the seller agrees not to negotiate with other buyers.
Training and transition: Will the seller stay on for a period post-closing to train the new owner?
Non-compete: Will the seller agree not to compete in the same industry for a defined period?
What to Watch Out For
Long exclusivity periods without adequate protections, vague earnout terms, and broadly written non-competes are common areas where sellers give up too much in the LOI stage. Having your broker and attorney review the LOI before signing is essential.
I help business owners in Northeast Florida evaluate and negotiate LOIs to protect their interests. Contact Ryan C. Winter before signing any offer.
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