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What is a Letter of Intent when selling or buying a business?

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A Letter of Intent or an (LOI) is either a non-binding or partially binding document that outlines the basic deal structure of a transaction.

When it comes to the purchase of a business, a Letter of Intent (LOI) is submitted prior to an official purchase agreement by a prospective buyer. This document is typically negotiated between two parties to get the basic deal structure in place. Most often, it is presented and agreed upon before proceeding to the due diligence process or an official purchase agreement.

LOI’s have provisions and special language outlining the basic, but important deal terms.

LOI’s vary greatly from transaction to transaction. Here are some of the common items that can be found:

Purchase Price: The purchase price is the total amount the prospective buyer will pay for the business.

Financing: Outlines the basic deal terms such as down payment, financed amount (either through bank or seller), and if necessary, contingency details.

Due Diligence: The due diligence clause typically refers to the due diligence period. It outlines the length of time the buyer has for their investigation process on the business. There should always be a clear start date and end date. (If you want to learn more about due diligence, read our blog post on “what is due diligence“).

Closing or Conditions of Closing: Usually outlines the high level details about closing the transaction. Some of the items that can be listed here are closing date and important contingencies.

Earnest Money: It is the amount of money paid to confirm the agreement.  Since most LOI’s are not completely binding, it is usually required by the seller or broker to confirm the buyer’s seriousness about the purchase of the business.

Expenses: Outlines who pays what expenses.

Expiration: Details the termination of the agreement presented

Please contact us if you have any questions or want to learn more. – Wishing you the best, Alex Khabbaz, Managing Partner and Austin Business Broker for Texas Business Brokers.

Alex Khabbaz - Austin Business Broker

Alex Khabbaz – Austin Business Broker

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