What is the purpose of a letter of intent (LOI) in a business sale?

/in , /by Al Statz

A Letter of Intent (LOI) in a business acquisition serves as a blueprint for the deal by establishing key terms, as well as process and timeline, before moving into due diligence and final agreements. It signals serious intent, based on what is known today, without final commitment. It helps both parties align their expectations and minimize wasted time and costs.

Key Purposes of an LOI in Business Acquisitions

1. Establishes Key Deal Terms

  • Defines the purchase price and deal structure (e.g., asset vs. stock sale, earnouts, seller financing).
  • Clarifies terms around payment, contingencies, and liabilities.
  • Helps both parties determine if they are aligned before investing in full due diligence and legal work.

2. Creates a Framework for Due Diligence

  • Allows the buyer to dig deeper into financials, operations, and risks before committing.
  • Gives the seller an idea of what information will be required and what potential hurdles may arise.

3. Includes Exclusivity to Prevent Shopping the Deal

  • Most LOIs include a “no-shop” clause, preventing the seller from negotiating with other buyers for a set period.
  • This protects the buyer from wasting time and money only for the seller to accept a better offer elsewhere.

4. Signals Serious Intent Without Full Commitment

  • While mostly non-binding, an LOI shows that both parties are serious about making a deal.
  • Some provisions, such as confidentiality, exclusivity, and break-up fees, may be binding.

5. Reduces the Risk of Late-Stage Surprises

  • A well-structured LOI helps avoid major renegotiations when drafting the final purchase agreement.
  • The clearer the LOI, the less room for misunderstandings later.

Why LOIs Matter

The LOI may be the most important document in a business sale process. A well written LOI reduces misunderstandings and renegotiations, and increases the probability of a successful closing. A weak or vague LOI often leads to delays, disputes, cost overruns, and failed deals.

Are you working on an LOI right now or planning to sell a lower middle market business? Contact Al Statz with any questions, or for information on our highly successful structured sale process.