Despite having language that may sound like a contract, a letter of intent to purchase a business is a non-biding document commonly used to put tentative agreements between a buyer and a seller in writing. A prospective buyer creates the LOI that basically serves as an "agreement to agree," which can then be used as a reference point during negotiations.
Documenting Points of Agreement
Generally speaking, an LOI documents the major aspects of the transaction that have been agreed upon at a specific point in time. The documentation of agreements can be used as benchmarks from which the negotiations to purchase a business can move forward. Despite being documented in the LOI, the agreements between parties are not binding and may be canceled or modified before finalizing the deal. Negotiations on the transaction's secondary details can then be continued with the prioritized points in general agreement.
Naming the Parties and the Price
The first two points included in an LOI are the buyer and seller's names, as well as the proposed purchase price of the business. During the course of the negotiations, the names of the two parties remain the same, but the purchase price may be modified at any point in the process. The change in the purchase price can be caused by a variety of reasons, including inconsistencies with information provided by the seller that are discovered during the buyer’s examination of financial documents, changing economic conditions or the loss of a key customer. The proposed purchase price may also describe whether the acquisition will be paid in a single payment, company stock or by installments.
Terms and Conditions
An LOI lists the terms and conditions under which the buyer proceeds with the transaction. The conditions may include a review of financial statements to verify information provided by the seller, vendor relationships and company tax returns. Depending on the information disclosed in the due diligence process, the acquisition may either move toward a final agreement, or a new LOI may be written to reflect modifications made by either the buyer or the seller. While most of the language in an LOI is non-binding, an exception would be the buyer’s agreement to confidentiality regarding information discovered during reviews of financial statements and tax returns.
Signature and Estimated Closing Date
The LOI includes a target date for the close of the transaction contingent upon due diligence process findings. This part of the document may also list the city and state where the transfer of ownership takes place. As a non-binding aspect of the document, the date of purchase may remain the same as recorded or may be changed to a date that both parties agree on if either one wishes to modify the terms of the original LOI. Only the buyer signs the document, hence the generally non-binding nature of the document.
After working for 21 years as a licensed adviser specializing in corporate and private finance, Scott Krohn began his writing career in 2008 covering a variety of topics including business, personal finance, health, and IT. He graduated from Cal State University, Long Beach with Bachelor of Arts degree.