Writing a Better Letter of Intent

September 22, 2022

6 Tips to Writing a Better Letter of Intent

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6 Tips to Writing a Better Letter of Intent

Unconventional Acquisitions

September 22, 2022

Alright, so you’ve put in the work and *finally* found the right boring business to invest your hard-earned cash (or someone else’s coin) in. 

Now it’s time to roll up your sleeves AND your socks because the real work is about to begin. 

As we say in Texas: giddy up, fam. 

The first line of business involves putting together a letter of intent (LOI), something we walk you through here. During the initial stages of any acquisition, crafting a solid LOI is essential. 

Without it, you could waste hours, days… heck, even months of your time doing due diligence for a business that simply ain’t it. 

Like us, you don’t have that kind of time to waste.

So you need to iron out all the details in your LOI before you ever start investing your time and fronting the cash. Plus, this stage sets the tempo for the dynamic between you and the previous owner(*cough cough* seller financing) if you decide to buy the business.

Real talk…the LOI helps you get all the deal-killing items out of the way so you can feel good about moving forward in the negotiation process. You wanna make sure you and the seller are on the same page.

Remember that it’s a letter of intent and not an actual agreement. So there’s nothing legally binding for any of the parties involved. This means you can forget the formalities for now. 

Instead, focus on making sure there are no serious deal-breakers before you draw up a legit agreement and start the due diligence process. 

We’ve already covered the key things you need to include in your LOI— you can check that out here. Now let’s dive a little deeper into how to draft up and finalize it so you can lock in that deal. 

1. Start With a Transaction Description.

When it comes to the intro you don’t want to come in hot with too much information—instead, just start with the basics. 

In this case, it involves a brief description of the deal. 

Let’s put it this way: if someone were to read just this section and nothing else, they would have a general understanding of the document’s purpose and intention. 

Pretty straightforward, right?

Some things to include in the intro section of the LOI are…

  • Who is buying WHAT from WHO?
  • Is this an asset or equity deal?
  • Will you be using an affiliate?
  • What is the timeline of the deal? 
  • Are there any terms used throughout the LOI that need to be defined? If yes, explain them here.

2. Next Up is The Purchase Price.

Now onto the juicy stuff. It’s time to talk money. 

In this section, you’ll want to lay it all out on the table. This way, you know that all parties involved are on the same page about the financial side of the deal.

You don’t want any confusion, so make it as straightforward as possible. It’s as simple as stating the amount paid for the business, when it will be delivered, and how it will be paid.

No sweat. But keep in mind that you will need to figure out the “how you’ll pay for it” before putting together the LOI. This could look like seller financing, a cash payout, or a bank loan.

If you’ve been here a while, you know how much we loooooove financing through the seller, so we recommend you try to make that happen. If you’re not sure how, we walk you through every single step in our business buying course

3. List All The Conditions For Closing.

When it comes to the transfer of ownership of the biz, you want it to go as smooooooth as possible. 

You don’t want things to go topsy-turvy or any important details to slip under the radar once you become the new owner. 

To avoid any craziness from going down while closing, you’ll want the closing conditions to be thoroughly outlined. You’ll also want to list all the details and actions that need to be taken to wrap up the deal.

Here are a few things you need to include as closing conditions…

  • Third-party consents such as landlord consents or material agreements
  • Financing conditions
  • The execution of definitive agreements
  • All required regulatory approvals

4. Don’t Forget About Due Diligence.

By now, there’s no doubt you understand the importance of doing your due diligence when closing an M&A deal. 

Sure, doing some research might not sound like the most exciting thing (sort of like buying a boring business…). Still, it’s crucial when discerning whether the business you’re looking to buy is worth your while. 

In your LOI, you’ll want to outline provisions that ensure the seller participates in a preliminary due diligence review. Whatever numbers, records, documents, etc. you want to see before you close on the deal should be discussed with the owner ahead of time. 

All in good faith, of course. 

This way, you can sniff out any liabilities or big waving red flags before a formal binding agreement is signed.

5. Wrap it Up With Exclusivity and Restrictive Covenants.

This one’s arguably THE most important. 

First, you need to make sure that the seller isn’t chatting up and entertaining other potential buyers. This confirms that there aren’t any other competing inquiries on the table once the document is signed, sealed, and delivered. 

It’s all about you and you only.

You should clearly state who the seller can disclose information about the deal to. An attorney? Fiancers? Stakeholders? You can add a confidentiality clause here to guarantee the information doesn’t end up in the wrong hands (like current employees or other prospective buyers). 

It’s also critical to build in a non-compete and non-solicitation agreement. The last thing you want is for the seller to steal back all your new customers and employees.

That’s no bueno.

Save yourself from a potential fiasco and add this in so the seller can’t compete against you once the sale of the business has gone through.

6. Add The Finishing Touches, So It’s Ready to Go.

The final piece of your LOI should include a non-binding effect, which simply reinforces that this document is not, in fact, a legally binding agreement. 

Before sending this bad boy off to the seller, you’ll want to involve some type of counsel. This should be an attorney with SMB LOI experience.

As we’ve already mentioned, this is the starting point of the negotiation process, but it does lay the foundation for more definitive agreements. If the warning bells are going off during the LOI stage, it’s a sign that you should respectfully bow out. 

See ya never.

Looking for more help crafting a killer LOI so you can feel confident about sending it off to secure your next deal? We go into more detail on what you need to do—and even give you templates to use—in our small biz buying course.

…or maybe you’re looking for further support and want more eyes on your LOI to make sure you’ve got all your bases covered, then our mastermind is the right place for you.

Yours Unconventionally,

Codie & Ryan

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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