LOI Explained

A Letter of Intent (LOI) is a document that outlines the key terms and conditions of a proposed transaction between a buyer and a seller when selling a business. While it's not legally binding like a contract, it serves as a formal indication of the parties' intention to proceed with negotiations. Here are the key elements typically included in a Letter of Intent for selling a business:

1. Introduction: Begin with a formal introduction stating the names of the parties involved (buyer and seller) and their respective roles.

2. Transaction overview: Provide a brief overview of the proposed transaction, including the type of transaction (e.g., sale of assets or sale of equity), the purchase price, and any other relevant terms.

3. Purchase price and payment terms: Specify the purchase price offered by the buyer and the proposed payment terms, including any down payment, installment payments, or financing arrangements.

4. Assets and liabilities: Detail which assets and liabilities are included in the sale. This may include tangible assets (e.g., equipment, inventory) and intangible assets (e.g., intellectual property, customer contracts), as well as any excluded assets or liabilities.

5. Due diligence: Outline the due diligence process, including the scope of due diligence investigations to be conducted by the buyer and the timeframe for completion.

6. Confidentiality and exclusivity: Include provisions regarding confidentiality and exclusivity, stating that the parties agree to keep the terms of the LOI confidential and that the seller will not negotiate with other potential buyers for a specified period.

7. Conditions precedent: Specify any conditions that must be satisfied before the transaction can proceed, such as obtaining financing, regulatory approvals, or the completion of due diligence to the buyer's satisfaction.

8. Timeline and closing date: Set forth the proposed timeline for completing the transaction, including key milestones and the anticipated closing date.

9. Governing law and jurisdiction: Specify the governing law and jurisdiction that will apply to the transaction and any disputes arising from it.

10. Signatures: Include signature blocks for the parties to sign, indicating their agreement to the terms outlined in the LOI.

It's essential to consult with legal and financial advisors when drafting a Letter of Intent to ensure that it accurately reflects the intentions of the parties and adequately protects their interests. While an LOI is not legally binding, it lays the groundwork for negotiating and drafting a formal purchase agreement.