Relying on a Handshake or a Letter of Intent (LOI)

In acquisitions, a Letter of Intent, or LOI, is a document that outlines the key business terms the buyer and seller agree to, which later become the basis for all agreements and documents that legally bind a business sale.

Common clauses in the LOI should include who the buyer and seller are, purchase price, structure of the deal, payment terms, owner financing, allocation of purchase price, seller’s continuing role, the extent and timing of due diligence, determination and life of escrows, length of the exclusionary period, closing costs responsibility, retention of key employees, terms of a non-compete and closing date.

The seller normally prefers as much detail as possible in the LOI and a short exclusionary period. The buyer, however, will want to wait until after due diligence to lock in terms and conditions, and will want the seller’s business off the market as long as possible. The seller has maximum leverage over the buyer just prior to signing the LOI. Immediately after the LOI is signed, negotiating leverage shifts to the buyer.

The LOI is a negotiated document and will involve time and expense for both parties. The introductory handshakes of buyer and seller are stressed under the tough negotiations of drafting an LOI.