What a Letter of Intent Actually Commits You To

Signing an LOI does not sell your business. It commits you to work with one buyer while that buyer checks your numbers against what you have told them. Most of the document sets out the price the buyer expects to pay and the way the buyer expects to pay it. A small number of clauses create real duties for you and those duties start on the day you sign.

How to read one

Most LOIs in deals of this size run two to five pages. A buyer uses them to put the price and the payment terms in writing before paying for diligence. A target date for closing goes in as well.

The purchase agreement is the document that sells the business. Lawyers draft it after diligence and a court can enforce it once both sides have signed. The LOI comes earlier and records the deal both sides expect if the numbers hold up. It also sets the rules for the weeks between signing and closing. Most owners read the price first and the rules last and that order works against them.

The parts that bind you

Most drafts label their binding clauses and two of them appear in nearly every LOI we review.

• Confidentiality. The buyer must keep your financials private and must keep the talks private as well. That covers customer names and margins and the fact that you are in talks at all. The duty usually continues after a deal ends without closing. Sellers have had tax returns passed around after a buyer walked away.
• Exclusivity. The clause is often called a no-shop clause in the draft itself. While the window runs you cannot invite other buyers to bid or negotiate with buyers who approach you. Exclusivity in deals of this size typically runs 45 to 90 days from signing. If that period looks long for the work the buyer still has to do you should raise it before you sign.

The cost shows up fast when another buyer appears during the window. You would have to tell that buyer to wait and some buyers will not wait. A buyer who moves on in the meantime may not come back when the window closes.

Some drafts also mark housekeeping clauses as binding and owners tend to skim past them. Costs are one example and most drafts say each side pays its own bills during diligence. Governing law is another and the clause names the state law for a dispute. Your attorney should be able to point to every binding clause in the draft and explain what it requires from you.

What is usually not binding

The price terms sit on the other side of that line and neither side is bound by them yet. Both sides are free to walk away from those terms at this stage.

• The price. The price reflects what the buyer believes your business earns based on the numbers you have shared so far. Diligence tests that belief and the price can move if tax returns or bank records tell a different story.
• The structure. How much arrives in cash at closing and how much rides on a seller note is still a proposal at this stage. The split often moves once a lender reviews the deal and sets its own terms.
• The closing date. The date is a target that both sides work toward in good faith. It moves when a lender needs more time or a landlord is slow to consent to a lease transfer.

Those terms become binding only when they are written into a signed purchase agreement. Until both sides sign that agreement there is no sale for a court to enforce.

The terms that matter more than the headline price

Four terms in the document matter more than the headline price for what you keep. Read each one before you react to the number at the top.

• Cash at close versus a seller note. Cash at closing is yours on the day the sale completes. A seller note pays over future years and payment depends on the business performing under new ownership. That split matters more than a small difference in the headline number.
• The transition period. Most buyers ask the seller to stay after closing and hand over customer relationships in person. The LOI should say how many months the buyer expects and if that time is paid. Unpaid months are part of the real price of the deal.
• Working capital. A buyer expects a business that can operate normally on the first morning after closing. That covers cash in the operating account and stock on the shelves for work already booked. Get the normal level written as a dollar figure so both sides measure the same thing.
• Closing costs. The LOI should name who pays each closing cost instead of leaving it for the final week. Attorney fees are the usual starting point and each side normally pays its own attorney. Lender fees belong to the buyer and transfer taxes need a name beside them in the draft.

Questions to ask before you sign

Four questions cover most of what an LOI leaves unsaid. The time to raise them is before you sign and every term is still open to discussion.

• How long is exclusivity? The window should fit the work the buyer still has to finish. A buyer who has seen clean books should not need the long end of the range.
• What happens if the buyer walks away? You need to know what returns to you if the buyer walks away. The weeks are gone for good but your right to talk to other buyers should return in full when the window ends.
• What information will you ask for first? A prepared buyer can name the first requests without hesitation. Tax returns usually come first and bank statements follow in the same request.
• When do my staff find out? Most owners keep a possible sale quiet until closing is close. Agree now on who tells the team and what staff hear about visitors walking the floor during diligence.

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