What is an LOI? 

 

If you’re new to buying a business, you’ve likely heard the term Letter of Intent (LOI). It might sound formal, but it’s really just a way to say, “I’m serious about buying this business, and here’s how I think we can make it work.” It’s not the final deal, but it’s a big step toward getting there.

To help you visualize how this works, let’s use an example: Imagine you’re  interested in buying a laundromat. It’s a straightforward business with steady cash flow, and you’ve done your homework to confirm it’s a good fit for you. Now, you want to show the seller you’re serious. That’s where the LOI comes in.

Let’s break it down in simple terms so you can feel confident when the time comes to draft or sign one.

 

A Letter of Intent is a document that outlines the basic terms of a potential business purchase. Think of it as a written handshake—it’s not legally binding (for the most part), but it shows both you and the seller are on the same page about the big stuff. It covers things like the purchase price, payment terms, and what needs to happen before the deal is finalized.

 

For example, imagine you’re buying a house. Before signing the final contract, you’d agree on the price, the closing date, and any conditions. An LOI works the same way for buying a business. It’s your way of saying, “Here’s what I’m offering, and here’s how I’d like to move forward.”

 

Why is an LOI Important?

An LOI might seem like just another piece of paperwork, but it’s actually a crucial part of the business-buying process. First, it shows the seller you’re serious. Submitting an LOI tells them you’ve done your homework and are ready to move forward. Second, it clarifies the key terms of the deal, like the price and payment structure, which helps avoid misunderstandings later. Finally, it saves time and money by ensuring both parties are aligned before diving into due diligence or final negotiations.

 

What’s Included in an LOI?

While every LOI is unique, most include a few key elements. The purchase price is the amount you’re offering to buy the business for. This could be a fixed number or a range, depending on how negotiations go. Next, the payment terms outline how and when the seller will get paid—whether it’s all at once or in installments.

The LOI will also include a due diligence period, which is your chance to dig into the business’s finances, operations, and legal matters to make sure everything checks out. There may also be conditions of the sale, like ensuring the business has no hidden debts or that key employees will stay on after the sale.

A confidentiality clause is often included to ensure both parties keep the details of the deal private. This is especially important if the business operates in a competitive industry. Finally, an exclusivity clause prevents the seller from entertaining other offers while you’re working through due diligence, giving you peace of mind that the business won’t be sold to someone else during this time.

 

Is an LOI Legally Binding?

This is a common question, and the answer is: it depends. In most cases, the LOI itself isn’t legally binding, meaning either party can walk away if things don’t work out. However, certain sections—like confidentiality and exclusivity—are usually binding. It’s always a good idea to have a lawyer review the document to make sure you understand what you’re agreeing to.

 

How Does an LOI Fit into the Business-Buying Process?

The LOI typically comes into play after you’ve found a business you’re interested in and have had some initial discussions with the seller. First, you’ll express your interest and start talking terms. Once you’ve agreed on the basics, you’ll draft the LOI and submit it to the seller for review. If they accept, you’ll move into the due diligence phase, where you’ll dig deeper into the business’s finances, operations, and legal matters. After due diligence is complete and both parties are satisfied, you’ll move on to drafting and signing the final purchase agreement.

 

Tips for Writing a Strong LOI

If you’re preparing an LOI, here are a few tips to keep in mind. First, keep it clear and concise. Avoid using overly complicated language—the goal is to make the terms easy to understand for both parties. Second, focus on the big picture. Don’t get bogged down in the small details at this stage; save those for the final contract. Third, be reasonable. Make sure your offer reflects the true value of the business. An unrealistic offer could scare off the seller. Finally, get professional help if you need it. While you can draft an LOI yourself, it’s a good idea to have a lawyer or business broker review it to ensure everything’s in order.

 

Final Thoughts

A Letter of Intent is more than just a formality—it’s a critical step in the business-buying process. It helps you and the seller get on the same page, sets the stage for negotiations, and ensures everyone is moving forward with a clear understanding of the deal. If you’re new to buying a business, don’t let the idea of an LOI overwhelm you. Think of it as a tool to help you navigate the process with confidence. And remember, you don’t have to do it alone. Whether it’s a lawyer, a business broker, or a trusted advisor, having the right support can make all the difference.

 

So, the next time you come across the term “Letter of Intent,” you’ll know exactly what it means and why it’s so important.