How do I write a letter of intent for buying a business?

A letter of intent is the first document in a purchase that both sides sign, and it is easier to write well when you know what it is for. BDC defines it as a document between a seller and a prospective buyer that establishes the main terms and conditions of a proposed transaction, for the purpose of directing and facilitating the negotiation of the final terms. It is not the purchase agreement. This guide covers how to write one for buying a business: what to have in hand first, what to put in it, how to handle the binding parts, and what comes after you sign.

Meet the seller and gather the basics first

BDC says the goal of the early meetings with the seller, where you learn why they want to sell, their price expectations and basic figures on sales and margins, is to collect the information you need to draft a letter of intent. That is the right order. A letter written before you understand what the business owns, what it earns and why it is for sale will either say too little or commit you to terms you have not tested. Before you draft, write down what you learned, what you still do not know, and which of those gaps due diligence has to close. The letter can then be short and still carry the points that matter.

What the letter should say

BDC lists a price range for the acquisition, subject to amendment, and the terms of payment, noting that the final price is determined only once due diligence is complete. It also lists the duration of negotiation exclusivity, the period during which the seller agrees not to solicit or consider other offers without first speaking with the buyer. BDC’s steps page also lists terms for confidentiality and communication. Beyond those items, ask your lawyer what else to include for your deal, such as what is being bought, the closing timetable and the conditions you want satisfied. Keep each term plain enough that the seller reads it the way you meant it.

Decide which parts bind and say so

BDC’s guidance says a letter of intent is not intended to be fully binding unless otherwise expressly stipulated. It adds that where the letter provides for it, binding obligations can arise on one party or the other, particularly on confidentiality and exclusivity. So the drafting task is to be explicit. Name the clauses that bind, such as confidentiality and exclusivity, and state that the price and the remaining terms are subject to due diligence and a signed purchase agreement. Our answer on backing out after signing an LOI explains what that means in practice.

Remember it still anchors the deal

BDC says that although the letter is not a binding offer, it anchors the transaction terms to some degree. Write the price range and payment terms as a position you are prepared to stand behind, even where they are not legally fixed. If a term is likely to change after due diligence, write it as a range or as conditional. If you already know you will want a protection later, such as a holdback or an indemnity, mention it now so it is not a surprise at the agreement stage. The related LOI preparation checklist is a useful working list.

Get advice before you sign

BDC says to involve your advisors at this stage, including your lawyer, accountant, transaction advisor and lender. Have your lawyer read the binding clauses in particular, because those are the ones that can create obligations before any agreement exists. Ask your accountant to check the payment terms against how you plan to fund the deal, and ask your lender whether the terms fit what it is willing to finance. BDC notes that the letter of intent is very often preceded by a confidentiality agreement protecting both parties’ information; if the seller asks you to sign one, read it as carefully as the letter itself.

Keep the wording plain and the scope narrow

A letter of intent works best when each sentence has one meaning. Name the parties and the business exactly as they appear in corporate records. Say whether the deal is for assets or shares, or leave that open on purpose and say so. Give dates for the exclusivity period and for any deadline to sign the purchase agreement. Avoid promising things you cannot yet check, such as that financing is arranged. If the seller’s lawyer sends a draft first, read it as closely as one you wrote, and ask for changes in writing rather than by phone.

What happens after it is signed

BDC notes that both parties will usually want to sign the letter before launching a formal due diligence on the business, and that the purchase agreement typically comes after the letter is signed and the bulk of due diligence is done. Due diligence tests your initial expectations, according to BDC, and lets you check for major red flags and confirm that the initial valuation and letter still make sense. For the next document, see letter of intent vs purchase agreement.