A Letter Of Intent, or LOI, is an "intermediate" document drafted and submitted to you by the buyer.
I say intermediate, because it is not the final contract. But it spells out the major elements of the sale the buyer and seller have agreed to so far. Typically, you will accept a Letter Of Intent and then enter into a period of exclusive negotiations with just one buyer.
The Elements Of The Letter Of Intent
Selling Price & Terms - Amount of cash down, interest rate and term as well as description of the security the buyer is providing the seller.
Structure - Is it an asset or stock sale? How is the sale price allocated among different elements of the sale such as non-compete clause and goodwill (this is important for tax reasons and is discussed in the next section).
Deadlines - How much time is the buyer requesting to complete the due diligence process and what is the proposed closing date? The buyer may also place a time limit (usually a week) on the seller to accept or decline the LOI itself.
Contingencies - The buyer's offer is contingent upon certain keys facts being confirmed. One example may be confirming that the current lease is transferable to the new owner. Also, their willingness to buy is contingent upon the due diligence period confirming that everything you have stated about the business is true.
Some Facts to Keep in Mind About The Letter Of Intent
1.) Don't accept an LOI that grants the buyer exclusive negotiation rights unless the Due Diligence period is short. 10-20 days of DD is sufficient for most small businesses. Some buyers will ask for exclusivity and a 2 month DD period. Your other prospects will eventually lose interest, leaving you with just one buyer. Then your one buyer will start asking for all sorts of concessions from you.
2.) Some buyers will want to skip the LOI and instead submit a full purchase contract. They figure, why should they pay their lawyer to draw up both documents. But a purchase contract requires a significant amount of time and attorneys fees to draft. Once the buyer has made this big investment in legal fees, it puts a lot of pressure on them that is detrimental to the negotiating process.
Better to encourage them from the start to go the LOI route.
3.) Hopefully, by this point you have developed more than one prospect. If you receive LOI s from more than one prospect don't just accept the one with the highest price. Be sure to take into account all the details of the offer as well as the qualifications and background of the buyer. This is especially true if you are financing part of the sale - getting a slightly higher price from a weaker buyer who runs the business into the ground and then doesn't pay you is of no benefit.
4.) It is perfectly all right to negotiate the contents of the LOI with the buyer before you have accepted it
If your most qualified prospect submits a Letter Of Intent that includes a lower price and more generous terms than you had wanted or a less qualified buyer has submitted a more attractive LOI, then now is the time to negotiate with the stronger prospect.
It's almost impossible to improve the deal once you have accepted (by signing) the Letter Of Intent. However, the buyer may find reasons to re-negotiate a lower price during the due diligence phase.
The Letter Of Intent you accept will be the best deal you will ever get.
Your selling memorandum, your recast financial statements, all your follow up communications with buyer and your tour of the facilities should all serve to justify your asking price. If the buyer has any objections or concerns about your asking price you want them to express them now rather than later.
Never be afraid to hear negative feedback or objections from the buyer - it means you will always know where you stand and gives you a chance to deal head on with their objections. And as far as disagreements over price go, the time to deal with them is before you accept the Letter Of Intent.
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