How to write a letter of intent (LOI) for business acquisition

Page written by Michael David. Last reviewed on July 23, 2024 . Next review due October 1, 2025.

Michael David is a financial writer and former investment advisor. Writing for Capital Group, Dimensional Fund Advisors, Franklin Templeton Investments, HSBC, Invesco, PIMCO, Vanguard, global insurance companies, major banks and others, he has educated professionals, business owners and consumers about strategies for investing, insurance, banking and corporate finance for more than 20 years.

Michael David is a financial writer and former investment advisor. Writing for Capital Group, Dimensional Fund Advisors, Franklin Templeton Investments, HSBC, Invesco, PIMCO, Vanguard, global insurance companies, major banks and others, he has educated professionals, business owners and consumers about strategies for investing, insurance, banking and corporate finance for more than 20 years.

Once you’ve set your objectives for buying a business, done your initial research and identified what looks like a good acquisition target, it’s time to let the seller know that you’re officially interested. This makes it possible to deepen your research and move the project forward. The tool you use at this point is a letter of intent — which is often referred to as an LOI.

What is a letter of intent?

A letter of intent is a letter from you to the seller of the business that lets them know that you are seriously considering submitting a formal bid to purchase the business, and that lays out the proposed transaction details at a high level. Although it is not a legally binding agreement to purchase, it may include elements that create binding obligations between the potential buyer and seller, including:

• Confidentiality agreement. This lets the seller know that they can safely disclose key information about the business to you, such as their financial records, client lists, and intellectual property, and that you will keep it confidential. This allows you to examine the business much more closely and puts the seller’s mind at ease.
• Exclusivity period. This sets out a period of time during which the seller agrees not to entertain offers from any other buyers without speaking to you first. This gives you the time you need to do your due diligence and protects your option to buy if you so choose. There may be financial penalties for the seller if they sell the business to someone else without consulting you during the exclusivity period.

Why is a letter of intent for business important?

A letter of intent, or LOI, is important for a business because it signals the beginning of due diligence and negotiations that are necessary to complete a business acquisition. It does not have to be a lengthy document and there is generally no standard format for an LOI. When it comes time to draft one, you will likely want the assistance of a lawyer who is experienced with such matters in order to ensure that it covers the right bases. It can protect you from exposure to any unintended consequences, especially if the deal doesn’t work out.

When to use a letter of intent

A letter of intent typically comes in after you’ve had your initial conversations with the seller of the business and done enough homework that you now intend to purchase the business, barring any negative surprises. The letter of intent lets the seller know that you are serious and acts as the opening salvo in a process that will involve further research and negotiation around price and other factors.

What should a letter of intent include?

A letter of intent typically includes several key elements that outline the intentions of the parties involved in a business transaction or negotiation. These elements may vary, but commonly include:

• Introduction: The letter begins with a brief introduction that identifies the parties involved and provides context for the purpose of the letter.
• Statement of intent: The main part of the letter outlines the intention, including the terms and conditions of the agreement or transaction.
• Description of the transaction: The letter include details about the transaction, such as the type of business deal being considered and any relevant background information.
• Terms and conditions: The letter outline the terms and conditions of the agreement, including key parts such as price, payment terms, and timeline.
• Confidentiality: The letter include a part to protect the confidentiality of the negotiations and any sensitive information shared between the parties.
• Exclusivity: In some cases, the letter also include a part granting one party exclusivity.
• Due diligence: The letter outline the process for conducting due diligence, including access to information and any deadlines for completing the due diligence process.
• Termination clause: The letter include the circumstances under which the letter of intent may be terminated by either party and the consequences of termination.
• Governing law: The letter specify the governing law that will apply to the agreement.
• Signature: The letter ends with the signatures of the parties, indicating their agreement to the terms outlined in the letter.

How to write a letter of intent for business

Remember your objectives when you write an LOI. Stick to the big idea and don’t try to be too precise or get bogged down in details. In fact, adding certain details like specific dates and dollar amounts can be risky, as they could make the document legally binding.

It’s often advised to hire a lawyer to write an LOI, but if you decide to do it yourself, you can follow this format:

• Introduction. State the purpose of the document, your name, the seller’s name and describe the transaction — who intends to buy what from who.
• Potential transaction. Here you can be more specific about an approximate price or price range that you are proposing, as well as rough timelines for the next steps.
• Contingencies. This is where you can spell out the conditions that will be necessary to make a deal. For example, you might need to be fully satisfied by the due diligence process or be successful in securing funding.
• Due diligence. Here you can go into detail about some of your due diligence expectations, such as the types of financial, customer, employee and other data that you will need to review as part of your decision-making process.
• Covenants and binding agreements. This is where you can add legally binding aspects to the LOI, such as a nondisclosure agreement or a non-compete agreement. These ensure that the buyer may not use the seller’s information to start a competing business.
• Non-binding agreement. Just to be super clear and avoid any misunderstanding, the LOI should specifically state that the agreement is non binding. It is not a firm offer to purchase the business.
• Closing date. This sets out a time limit for the due diligence and negotiation process. If the deal has not been closed by this date, the LOI expires, and both parties can move on.

Key considerations for writing a letter of intent for business

A few helpful guidelines:

• Be accurate. An LOI sets the tone for the negotiation with the seller, it might be required to secure your funding, and although it may not be legally binding, the seller always has the right to take it to court if something goes wrong. Take time to double-check all the names, dates, and amounts.
• Keep it simple. There’s no need to say more than what’s required to get to the next step. The more details or complex language you add, the more likely there will be a misunderstanding. Keep it short and sweet.
• Consider a lawyer. If the transaction is very straightforward or for a relatively minor amount, feel free to draft your own LOI. But if there is a hint of doubt or you prefer to err on the side of caution, a lawyer with experience in LOIs can be invaluable.