Letter of Intent (LOI): A Key Step in Buying or Selling a Business

A Letter of Intent (LOI) is a crucial document for any business transaction, whether you are buying or selling a company. It sets the foundation for negotiations and helps ensure both parties are aligned before moving forward with a formal contract. While an LOI is not always legally binding, it clarifies key deal terms, reducing misunderstandings and costly disputes.

Why Is a Letter of Intent Important?

For business buyers and sellers, an LOI helps:

• Outline key terms before drafting a purchase agreement.
• Prevent the business from being sold to another party (via exclusivity clauses).
• Allow the buyer to conduct due diligence with confidence.
• Provide a structured framework that streamlines negotiations.

Key Components of a Business LOI

1. Binding vs. Non-Binding Terms

• Non-Binding: The majority of LOI terms, including the purchase price and assets included, remain non-binding until a final agreement is signed.
• Binding: Certain clauses—such as confidentiality and exclusivity—are often legally binding to protect both parties.

2. Purchase Price & Payment Terms

• Clearly define the total purchase price and the payment structure (e.g., cash, financing, stock, or an earn-out agreement).
• If financing is required, specify contingency terms.

3. Due Diligence Period

• Buyers need access to financial records, contracts, leases, and tax documents.
• The LOI should outline an exclusivity period during which the seller cannot negotiate with other buyers.

4. Excluded Assets & Liabilities

• Identify assets not included in the sale, such as cash, personal vehicles, or specific equipment.
• Exclude liabilities such as outstanding debts or employee-related obligations.

5. Closing Conditions & Contingencies

• Common conditions include:
  • Buyer securing financing.
  • Necessary third-party approval – there can be a long lead time, especially when dealing with a commercial lease. For more on this, see our previous post on Successful Business Strategies – Assignability of Key Contracts. 
  • The seller maintaining normal business operations until closing.

6. Restrictive Covenants

• Many LOIs include non-compete and non-solicitation clauses, preventing the seller from starting a competing business after the sale.

FAQs: Letters of Intent for Business Transactions

Q: Is a letter of intent legally binding?

A: Most LOIs are not legally binding, but certain clauses—such as confidentiality and exclusivity—may be enforceable.

Q: Do I need a lawyer to draft an LOI?

A: Yes. A business attorney ensures your interests are protected and helps avoid costly legal mistakes.

Q: Can a letter of intent be revoked?

A: Yes, unless specific binding clauses state otherwise. However, revoking an LOI after extensive negotiations may harm business relationships.

Why Work with Anderson Leavitt?

Navigating a business transaction without legal guidance can lead to costly mistakes. At Anderson Leavitt, our Pennsylvania business attorneys have extensive experience assisting business owners with LOIs, negotiations, and purchase agreements.

📞 Contact us today for a consultation on your business transaction.

This entry is presented for informational purposes only and is not intended to constitute legal advice.