The Starting Place: A Letter of Intent (LOI)
Most business owners only sell one business in their entire lifetime. Thus it can be an emotional and intimidating process unless it is broken down into some very basic elements. One of the early steps in a typical transaction is receiving a Letter of Intent (LOI) from a potential buyer.
The purposes of the LOI are multiple: to clarify the key points of the proposed transaction, including sales price, to make formal declarations that the parties are acting in good faith to complete a contract for the transaction and to eventually take the business off the market while a due diligence review of the seller’s company is completed by the buyer. The latter point is often a concern to a seller who may believe they are missing another possible selling opportunity while due diligence is underway. This is also why the LOI typically includes the proposed date for closing the transaction, though this may be adjusted during the due diligence process.
How binding is the LOI on both parties? While this question is raised, we tend to focus on what we believe is a best practice in developing a contract – contracts are meant to facilitate a win-win for the buyer and seller, not a means to punish either or both parties. In this spirit, an LOI is a starting place for a productive relationship. If that happens, it paves the way for a mutually beneficial transaction. If during the LOI and due diligence process the parties discover significant differences in their perspectives, the transaction rarely proceeds to conclusion. When this happens the LOI usually gives each party considerable latitude to end the agreement and move forward with little lost except some time.