What Goes in a Letter of Intent?

At Legal Direction, we love helping local entrepreneurs buy existing businesses or franchises.

These deals often start with a nondisclosure agreement and a letter of intent.

The nondisclosure agreement allows the seller and their broker to tell the buyer information about the business, its customers, its financing, etc. Most people are familiar with the purpose of a nondisclosure or confidentiality agreement.

Letters of Intent can be more unfamiliar. The purpose of the Letter of Intent is to make a written offer to buy a business. It outlines the basic business terms of the transaction and marks items that have to be negotiated. A typical letter of intent will include a description of what is being bought (stock or assets), the price, the structure of payments (bank financing, seller financing, earn-out), the timing of purchase, what the seller needs to do anything prior to sale (get rid of old inventory, pay off debt), what kind of investigation period there will be (due diligence) and whether the Seller needs to sign a non-compete agreement. It might also include a list of items the buyer doesn’t want to include in the deal.

Two important provisions in a Letter of Intent are earnest money and exclusivity. If the buyer is going to invest time and money in due diligence, they want to make sure the seller isn’t going to sell it to someone else out from under them. The seller wants to make sure the buyer is truly committed. Usually the parties signify their seriousness by the buyer putting up some earnest money and the seller agreeing not to talk to other potential buyers for a certain amount of time.

Earnest money usually is refundable until the due diligence period expires, but sometimes the money is “hard” or not refundable.

Often brokers draft the letter of Intent, and then lawyers draft the “definitive agreement” that is much more robust.

Letters of Intent are often non-binding, but they can be an important tool to make sure the buyer and the seller can get to the same page on the terms of the deal.