A Letter of Intent (LOI) to purchase a business is a crucial document that serves as a preliminary agreement between a potential buyer and a seller. It outlines the key terms and conditions of a business acquisition before the final purchase agreement is drafted. An LOI signals serious buyer interest, sets the framework for negotiations, and establishes important provisions such as purchase price, due diligence, and exclusivity.

Whether you are looking to buy a small business, acquire a franchise, or negotiate a merger, having a well-structured LOI can help streamline the transaction process and build trust between both parties.

Table of Contents

• What does a letter of intent to purchase a business mean?
• What are the essential elements in an LOI to purchase a business?
• Why do we need an LOI to purchase a business?
• When do we need an LOI?
• FAQs

What Does a Letter of Intent to Purchase a Business Mean?

A Letter of Intent (LOI) to purchase a business is a formal, yet typically non-binding document that expresses the buyer's intent to purchase a business under certain conditions. It is one of the first steps in the acquisition process and provides a structured outline of how the sale will proceed.

Key Purposes of an LOI:

1. Formal Expression of Interest: An LOI signals to the seller that the buyer is serious about acquiring the business and is willing to proceed with negotiations.
2. Establishing Initial Terms: It lays out the fundamental conditions of the sale, including the purchase price, payment structure, due diligence process, and exclusivity periods.
3. Facilitating Due Diligence: An LOI often includes a due diligence clause, allowing the buyer to review the company's financials, operations, legal obligations, and other critical aspects before committing to the purchase.
4. Negotiation Framework: Having an LOI in place ensures clarity and reduces misunderstandings, providing both parties with a starting point for formal contract drafting.

While most LOIs are non-binding, they often contain certain legally enforceable clauses, such as confidentiality and exclusivity agreements.

What Are the Essential Elements in an LOI to Purchase a Business?

A well-crafted LOI should clearly define the key terms and conditions of the proposed acquisition. Here are the essential components to include:

1. Buyer and Seller Information

• Full legal names of both parties
• Business name and details of the company being purchased
• Contact information for all involved parties

2. Proposed Purchase Price

• The agreed-upon price (fixed amount or negotiable range)
• Any potential price adjustments (e.g., based on revenue performance)

3. Payment Structure

• Payment terms (cash, seller financing, installment payments, or a combination)
• Deposit or escrow details

4. Due Diligence Period

• Buyer’s timeframe to conduct due diligence (usually 30–90 days)
• Scope of financial, operational, legal, and tax review
• Seller's obligation to provide necessary documents and disclosures

5. Exclusivity Clause (No-Shop Agreement)

• Prevents the seller from negotiating with other buyers for a specified period
• Ensures the buyer has an exclusive right to pursue the deal

6. Closing Date and Timeline

• Target closing date for the transaction
• Milestones such as finalizing the purchase agreement, completing due diligence, and obtaining regulatory approvals

7. Contingencies (Deal Conditions)

• The sale may be contingent upon certain conditions, including:
• Approval of financing
• Satisfactory results from due diligence
• Obtaining necessary permits or licenses
• No material changes in business performance before closing

8. Confidentiality Clause

• Ensures both parties keep transaction details private
• Prohibits disclosure of financial records, customer data, or trade secrets

9. Binding vs. Non-Binding Provisions

• The LOI itself is typically non-binding, meaning it does not legally obligate the parties to complete the transaction.
• However, certain provisions like confidentiality, exclusivity, and dispute resolution can be legally binding.

10. Signatures

• Signatures from both buyer and seller to indicate agreement on the proposed terms

Why Do We Need an LOI to Purchase a Business?

A Letter of Intent serves several critical functions in a business acquisition. Here’s why it’s important:

1. Defines the Framework for the Deal

• Establishes clear expectations for both parties
• Reduces confusion and prevents miscommunication

2. Saves Time and Legal Costs

• Streamlines negotiations, reducing the need for constant back-and-forth discussions
• Minimizes the need for expensive legal revisions in the final purchase agreement

3. Facilitates Due Diligence

• Allows the buyer to review company records, contracts, financial statements, and liabilities before committing
• Helps uncover potential risks and deal-breakers

4. Protects the Buyer and Seller

• The exclusivity clause prevents the seller from accepting competing offers
• The confidentiality clause protects business-sensitive information

5. Helps Secure Financing

• Banks and investors often require an LOI before approving business acquisition loans

When Do We Need an LOI?

A Letter of Intent is commonly used in the following scenarios:

• Initiating the Business Purchase Process: When a buyer is ready to move forward with negotiations
• Competitive Bidding Situations: When multiple buyers are interested in acquiring the same business
• Securing an Exclusivity Agreement: To prevent the seller from accepting competing offers
• Before Conducting Due Diligence: To outline buyer’s access to financial records and business details
• When Legal or Regulatory Approvals Are Required: To define timelines for licenses, permits, and approvals

FAQs

1. What is an LOI to acquire a business?

A Letter of Intent (LOI) to acquire a business is a non-binding agreement that outlines the preliminary terms of a business acquisition. It includes details such as the proposed purchase price, payment terms, due diligence process, and closing timeline.

2. What is an intent to purchase a business agreement?

An Intent to Purchase a Business Agreement is another term for an LOI. It formally expresses the buyer’s intent to acquire the business and establishes key transaction terms before drafting the final purchase contract.

3. Is an LOI necessary to purchase a business?

While not legally required, an LOI is highly recommended because it:

• Helps structure the deal and avoid misunderstandings
• Provides a roadmap for final contract drafting
• Protects the buyer through due diligence and exclusivity

4. Can an LOI be legally binding?

Most LOIs are non-binding, but specific clauses like confidentiality, exclusivity, and dispute resolution can be legally enforceable.

5. What happens after signing an LOI?

After signing an LOI, the next steps typically include:

• Due diligence (financial, operational, legal review)
• Negotiating final terms and conditions
• Drafting and signing the definitive purchase agreement
• Closing the transaction (funds transfer, business handover)

Final Thoughts

A Letter of Intent (LOI) to purchase a business is an essential document that streamlines negotiations, facilitates due diligence, and sets the groundwork for a smooth acquisition.

By ensuring clarity on pricing, payment terms, contingencies, and legal protections, an LOI helps both buyers and sellers navigate the transaction with confidence.

If you’re planning to buy or sell a business, drafting a well-structured LOI can save time, minimize risk, and lead to a successful deal.

Sample template for a LOI to purchase a business