Letter of Intent (LOI)

Template — not a legal document

TEMPLATE, NOT A LEGAL DOCUMENT. This is an educational template produced by ExitAdviser to show what a letter of intent normally contains and why each provision is there. It has not been drafted for your transaction, your state, or your circumstances, and nobody has reviewed it on your behalf. It is not legal advice and no solicitor-client or attorney-client relationship arises from using it. Laws differ by jurisdiction and change over time. Have a qualified attorney draft or review any agreement before you sign it.

date

Seller name
address

Re: Letter of Intent to Purchase business name

Dear Seller,

This letter sets out the principal terms on which Buyer name (“Buyer”) proposes to acquire substantially all of the assets of the Business (the “Business”) from Seller name (“Seller”). Except as expressly stated in Section 11, this letter is not binding and creates no obligation to complete a transaction.

1.TransactionNon-binding

Buyer would acquire the Business by way of a purchase of substantially all assets used in its operation, free of liabilities other than those expressly assumed. The definitive agreement would reflect customary terms for a transaction of this type.

Say which structure you mean

An LOI silent on asset versus stock defers a decision with substantial tax consequences for both sides. Sellers generally prefer stock, buyers assets, and the gap is worth real money. Agreeing the structure now prevents a renegotiation dressed up as a drafting question later.

2.Purchase PriceNon-binding

The purchase price would be $2,000,000, on a cash-free, debt-free basis, subject to a working capital adjustment, payable as follows:

(a)$50,000 deposit on execution of the definitive agreement, held in escrow and credited at closing;

(b)$1,700,000 in cash at closing;

(c)$300,000 by seller promissory note on terms to be agreed.

Cash-free, debt-free is doing work here

It means the seller keeps the cash and pays off the debt at closing, and it is the usual convention. Without the phrase, buyer and seller can hold genuinely different views of what the price includes. Add the working capital target as a number if you can — agreeing it later is where post-LOI disputes concentrate.

3.Due DiligenceNon-binding

Buyer would complete its due diligence within 45 days of execution of this letter, covering financial, legal, tax, operational, employment and environmental matters. Seller would provide reasonable access to records, premises, key personnel and advisers.

Access is binding even though diligence is not

Note the asymmetry. Buyer’s obligation to buy is not binding, but Seller’s obligation to give access usually is — see Section 11. A seller signing this is committing real time and disclosure without a committed buyer on the other side. That is normal, and it is a reason to qualify the buyer before signing rather than after.

4.FinancingNon-binding

Buyer intends to fund the purchase through a combination of equity and third-party financing, expected to include an SBA-guaranteed loan. Buyer has obtained pre-qualification / applied and would use commercially reasonable efforts to obtain a commitment within 45 days.

What a seller should ask for here

A financing contingency with no deadline lets a deal drift for months. Sellers commonly ask for a pre-qualification letter attached to the LOI and a date by which financing must be committed, after which either party may terminate. A buyer who cannot produce a pre-qualification letter has not started.

5.ExclusivityBinding

From the date of this letter until the earlier of 60 days or termination of negotiations, Seller shall not, directly or indirectly, solicit, encourage or entertain any offer, enquiry or discussion regarding the sale of the Business, its assets or its equity with any party other than Buyer, and shall notify Buyer promptly of any unsolicited approach.

The clause with the most real consequence

This is binding, and it takes your business off the market for the whole period. If the buyer walks away on day fifty-five, you have lost two months of market exposure and any other interested party has moved on. Keep it as short as the diligence genuinely requires — thirty to sixty days is typical — and consider tying any extension to the buyer having financing committed. A buyer asking for ninety or a hundred and twenty days without a funded commitment is asking you to carry their optionality.

6.ConfidentialityBinding

Each party shall keep confidential all information received from the other and the existence and terms of these discussions, and shall use such information solely to evaluate the transaction. This obligation survives termination of negotiations for two years and is in addition to any separate confidentiality agreement.

Mutual matters more than it looks

Sellers focus on protecting their financials. Buyers care about the fact of the discussion becoming known. The existence of negotiations should be confidential too — staff, customers and competitors learning a business is for sale can damage it whether or not a deal completes.

7.ConditionsNon-binding

A transaction would be conditional on: completion of due diligence to Buyer’s reasonable satisfaction; Buyer obtaining financing on acceptable terms; execution of a definitive purchase agreement; landlord consent to assignment or a new lease on acceptable terms; no material adverse change in the Business; and receipt of any required third-party or regulatory consents.

8.Transition and Restrictive CovenantsNon-binding

Seller would provide transition assistance for 90 days following closing on terms to be agreed, and would enter into customary non-competition and non-solicitation covenants for a period to be agreed in the definitive agreement.

Worth outlining now, not later

“To be agreed” on transition is where deals stall late. If the buyer expects the seller on site five days a week for three months and the seller expects to answer phone calls, that gap surfaces in week ten. A sentence on hours, duration and whether it is paid saves a fortnight of negotiation.

9.TimingNon-binding

The parties would work toward executing a definitive agreement within 30 days and closing within 90 days of the date of this letter, subject to satisfaction of the conditions above.

10.ExpensesBinding

Each party shall bear its own costs and expenses, including legal, accounting and advisory fees, whether or not a transaction is completed.

Read this before you spend money

Binding, and it means a seller who spends fifteen thousand dollars on legal and accounting work during a deal that collapses has no recourse. Some sellers negotiate a break fee where the buyer walks for reasons other than a diligence finding — uncommon in small transactions, but worth asking for when the exclusivity period is long.

11.Binding and Non-Binding ProvisionsBinding

Sections 5 (Exclusivity), 6 (Confidentiality), 10 (Expenses), this Section 11 and Section 12 are intended to be legally binding and enforceable. All other provisions of this letter are statements of intent only, are not binding on either party, and create no obligation to negotiate, to continue negotiating, or to complete a transaction.

No binding obligation to complete a transaction arises unless and until a definitive written agreement is executed by both parties.

The most important paragraph in the document

Without this section a court may have to decide what the parties intended, and the answer is unpredictable. Some jurisdictions read an obligation to negotiate in good faith into an LOI even where the commercial terms are non-binding. State explicitly which sections bind and that nothing else does, and make sure the list matches the sections you actually meant.

12.Governing LawBinding

This letter and the binding provisions above are governed by the laws of state, without regard to conflict of laws principles.

If the foregoing reflects your understanding, please sign and return a copy of this letter. We look forward to working toward a successful transaction.

Buyer — name

Date

Agreed — Seller name

Date