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May 12, 2022

What to Include In A Letter of Intent

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What to Include In A Letter of Intent

Unconventional Acquisitions

May 12, 2022

So, you found a business that you’re interested in buying. Great! Now the real work begins…

A letter of intent, or LOI, is the first documented touchpoint and non-binding agreement between all parties that will be involved in a business deal, be it a merger, acquisition, or joint venture. 

When it comes to understanding why a letter of intent is so important when buying a small business, it all comes down to getting the right information you need to make an informed decision and completing your due diligence before you purchase. 

Once this paperwork is approved by the current owner, you’ll get access to non-public information like the seller’s financial, company records, and customer information to verify accuracy and make sure this is a good deal for you to pursue.

One thing to keep in mind if you’re in the LOI stage of acquisition—you don’t need to get down to the nitty-gritty. This stage is more about setting up a negotiation process than setting up a formal, binding agreement. 

If you can, some good advice to follow here is to keep it simple (which we’re aaaaaaall about here at Unconventional Acquisitions). 

Whether you’re in the process of drafting up your first or fiftieth letter of intent, hereare a few key things that should be included in your document:

Pricing and other considerations

This is one of the trickier sections to get right, as there are often a lot of moving parts.
A couple of ideas what to outline here…

  • Will you be paying in cash? All or partial stock? Earnout? Commissary note? etc.
  • Will you request a price adjustment? 
  • How will you structure the transaction? (i.e. asset purchase, purchase of all outstanding shares, or a merger)
  • Will you require an exclusive negotiation period (or “no shop clause”) so the seller cannot continue current negotiations with other buyers? 

Not sure how to structure your LOI or if you’ve even got a good deal on your radar? We do real-life breakdowns and deal reviews in the weekly calls of our UA mastermind.

Closing contingencies and confidentiality

You’ll want to outline any hard boundaries you’d like to set around what the seller can and cannot communicate (and with who), as well as what to expect should the deal approach closing.

A few thoughts here on what to include…

  • Can the seller change the operational integrity of the business prior to the sale? 
  • Do you want a non-solicitation agreement included so the seller cannot solicit their employees or customer base prior to the sale? 
  • Can the seller divulge any information about the sale to other buyers? Sellers? Financers? Key stakeholders? etc. 

Timelines and termination date

For the seller, time is of the essence. Because mergers and acquisitions can take up a lot of upfront time and financial costs and be a potential distraction for a small business owner, it’s best to set firm boundaries to help keep things timely and running smoothly.

If an LOI is thoughtfully considered, well-crafted, and negotiated with care, a letter of intent to buy a small business can offer both the buyer and the seller the protection they need to speed up the process.

You’ll want to include key pieces of information like…

  • What high-level deliverable due dates and/or meetings are required to keep negotiations on track? 
  • When is your targeted closing date and is it firm? 
  • Is there a date where the LOI will be considered null and void?

A note on LLCs and formations in your LOI

We’ve seen this question come up a few times in our mastermind, so we wanted to give some context here. You may think that you need to have already formed your LLC or S-Corp prior to submitting a letter of intent, but that’s not necessarily the case. 

As long as you submit your LOI or offer sheet to the business with a brief outline or reference to how you’ll be buying—something like “purchased by Jane Doe or assigned,” for example—you’ll be okay if you are still waiting on your official formation certificate from your state.

Because most states can file formation paperwork fairly quickly—typically in a matter of a few weeks once submitted—there shouldn’t prevent you from sending in a letter of intent to a seller or slow down your negotiation process.

Want to learn more about what to include and how to write a clear, concise, and killer LOI for your next deal? We’ll walk you through the exact elements you’ll need to include (and also give you the templates you need to get started) in our online course for small business buyers

Yours Unconventionally,

Codie Sanchez & Ryan Snow
Co-founders Unconventional Acquisitions

 If you want to learn more about how to find and buy businesses, check out these articles👇

You can also register for the course here OR if you are serious about buying a small business, join our Mastermind.

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