After months of preparing your business for sale and speaking with potential buyers, receiving a letter of intent can feel like a major breakthrough.
The document may include a purchase price, proposed payment terms, a due-diligence period, and a target closing date. It may even explain what will happen to inventory, working capital, employees, and your role after the sale.
It can feel like the deal is complete.
It is not.
A letter of intent, commonly called an LOI, is a preliminary document that outlines the major terms under which a buyer is willing to continue pursuing the acquisition. It is generally not the final purchase agreement, but it creates the framework for the next stage of the transaction.
That makes it one of the most important documents a business owner may review during the sale process.
At CTA Business Brokers, we help business owners throughout King, Snohomish, and Pierce Counties understand the practical meaning behind an LOI before they enter due diligence and final negotiations.
What Does a Letter of Intent Include?
An LOI confirms that the buyer and seller have reached a preliminary understanding on the major deal points.
It may include:
- The proposed purchase price
- How the buyer plans to pay
- Whether the sale will be structured as an asset or equity transaction
- The buyer’s financing requirements
- The expected due-diligence period
- Working-capital requirements
- The seller’s transition responsibilities
- A proposed closing date
- An exclusivity or no-shop period
- Which provisions are binding or nonbinding
The LOI does not need to resolve every detail of the sale. That is the purpose of the final purchase agreement.
However, it should resolve enough of the major issues to justify the time and expense of moving forward.
The Purchase Price Does Not Tell the Whole Story
The first number most sellers look for is the purchase price.
That number is important, but it is only one part of the offer.
A $3 million offer paid almost entirely at closing may be more attractive than a $3.4 million offer that includes a large earnout, substantial seller financing, or other conditions that make part of the price uncertain.
When reviewing the offer, ask:
How much will be paid at closing?
Is part of the price dependent on future performance?
Will you be required to finance a portion of the transaction?
Is inventory included in the price?
Could the price be adjusted based on working capital or due-diligence findings?
Two offers with similar purchase prices can produce very different results for the seller.
The strongest offer is not always the one with the highest headline number. It is the one most likely to close on terms that align with your financial and personal goals.
Financing Contingencies
Many business acquisitions depend on third-party financing.
The buyer may use a bank loan, an SBA-backed loan, personal capital, investor funds, seller financing, or a combination of these sources.
If the LOI contains a financing contingency, the buyer may not be required to close unless acceptable financing is obtained.
That does not automatically make the offer weak. However, the seller should understand how much progress the buyer has made.
Has the buyer spoken with a lender?
Has the lender reviewed preliminary financial information?
How much cash is the buyer contributing?
Is the seller expected to carry a note?
When must financing approval be obtained?
A vague, open-ended financing contingency can leave the seller’s business tied up while the buyer searches for funding.
A stronger LOI sets clear deadlines and explains what the buyer must do to move the financing process forward.
Exclusivity and the No-Shop Period
Many LOIs include an exclusivity provision, sometimes called a no-shop clause.
This provision may prevent the seller from marketing the business, requesting other offers, negotiating with another buyer, or providing information to competing purchasers for a specified period.
From the buyer’s perspective, this is understandable. Due diligence can require significant time and expense, and the buyer does not want to pursue the acquisition while the seller shops the offer to others.
But exclusivity also creates risk for the seller.
Once the LOI is signed, the business may effectively be removed from the market. Other buyers may move on, and the seller may lose leverage if the transaction stalls.
Review when exclusivity begins, how long it lasts, whether it automatically renews, and what progress the buyer must make during that period.
The buyer receives a valuable benefit through exclusivity. In return, the seller should receive clear deadlines and consistent progress toward closing.
What Happens During Due Diligence?
After the LOI is signed, the buyer usually begins formal due diligence.
This is when the buyer verifies the financial, operational, legal, and commercial information presented about the business.
The buyer may request:
- Tax returns and financial statements
- Bank statements
- Customer and supplier contracts
- Employee and payroll information
- Equipment and vehicle records
- Commercial leases
- Licensing information
- Accounts receivable and payable reports
- Loan and lien documentation
- Insurance and claims history
- Intellectual property records
The buyer may compare financial statements with tax returns, test seller add-backs, inspect equipment, evaluate contracts, and review customer concentration.
If the buyer discovers information that differs materially from what was originally presented, the buyer may request a lower price, revised terms, additional protections, or the right to terminate the transaction.
The best way to reduce that risk is to prepare before the LOI is signed. Organized records and accurate financial information help create buyer confidence and keep the transaction moving.
Why Working Capital Matters
Working capital is one of the most misunderstood parts of a business-sale LOI.
In many transactions, the buyer expects the company to be delivered with a normal level of operating working capital. This may include accounts receivable, inventory, prepaid expenses, accounts payable, and other short-term operating assets and liabilities.
The buyer does not want to acquire the business and immediately contribute more money simply to maintain normal operations.
The seller, however, may assume that all cash and accounts receivable will remain with them after closing.
That difference in expectations can lead to a significant disagreement.
The LOI should explain which accounts are included, how the working-capital target will be calculated, whether inventory is included in the purchase price, and what happens if the actual amount is above or below the target at closing.
Working-capital language should not be treated as boilerplate. Depending on the business, it can have a substantial effect on the seller’s final proceeds.
Seller Transition Assistance
Most buyers will expect the seller to provide some level of assistance after closing.
This may include introducing customers, training the buyer, explaining operational procedures, transferring vendor relationships, or helping retain important employees.
The key issue is scope.
How long must the seller remain involved?
How many hours of assistance are included?
Will the seller receive additional compensation?
Is the seller expected to work full-time, part-time, or only as needed?
A seller expecting to provide two weeks of introductions may be surprised if the buyer expects several months of daily support.
The LOI should establish a reasonable framework before attorneys draft a separate transition, consulting, or employment agreement.
The appropriate period depends on the business. A professional services company built around the owner’s relationships may require a longer handoff than a manufacturing company with an established management team.
Which LOI Terms Are Binding?
Many LOIs state that the proposed acquisition terms are nonbinding until the parties sign a final purchase agreement.
This may include the purchase price, transaction structure, financing plan, working-capital target, and closing date.
However, certain sections are often intended to be binding.
These may include:
- Confidentiality
- Exclusivity
- Access to company records
- Responsibility for professional expenses
- Public announcements
- Non-solicitation of employees
- Governing law
- Return of confidential information
The document’s title does not determine its legal effect
Calling a document a letter of intent does not guarantee that every provision is nonbinding. The specific wording and conduct of the parties can matter.
Every seller should have the LOI reviewed by an experienced intermediary before signing it. Tax and accounting advisers should also review any provisions that could affect the seller’s net proceeds.
What Happens After the LOI Is Signed?
Once the LOI is signed, the transaction usually becomes more active.
The buyer begins due diligence and works with lenders. Attorneys prepare the purchase agreement and related documents. Accountants analyze financial information. Lease assignments, licensing transfers, third-party approvals, and closing requirements begin moving forward.
This is also when overlooked issues often surface.
A landlord may require a new guarantee. A customer contract may not be transferable. A vehicle may have an outstanding lien. A critical license may be tied to the owner.
A well-written LOI cannot anticipate every possible problem, but it gives both parties a framework for addressing those issues without renegotiating the entire transaction.
Review the Deal Before You Sign
Receiving a letter of intent is an important milestone, but signing it should never be treated as a formality.
The purchase price, financing contingency, exclusivity period, due-diligence rights, working-capital requirement, transition obligations, and binding provisions can all affect the seller’s outcome.
At CTA Business Brokers, we help business owners throughout King, Snohomish, and Pierce Counties evaluate offers, understand proposed deal structures, and prepare for what happens after an LOI is signed.
Contact CTA Business Brokers for a confidential conversation about your business operations and the process of selling it. Understanding the process and terms of a transaction can help protect your leverage, reduce surprises, and help you move toward a closing with greater confidence.