So you’ve found someone who’s interested in buying your online business. Congrats!
You know an LOI is typically the next step… but what does that mean, exactly? What should you expect to see in a letter of intent, and how can you ensure it’s written in your favor?
A letter of intent is the first step toward a successful acquisition. So it’s worth taking the time to understand all the ins and outs of this document.
What is an LOI in a business sale? The acronym stands for “letter of intent.” Or more fully, a letter of intent to purchase.
A buyer is interested in buying your business…but they need to know more, so they can make a final decision. The LOI is an agreement by the seller to consider a sale to this buyer.
Signing an LOI starts the purchase process and enables the buyer to learn all they can about your business. Then, they’ll make a final decision on whether to buy it.
So what’s in this legal document that opens the doors to letting strangers scrutinize your business’s financials?
Terms spelled out in the letter of intent may include:
If this is the first time you’ve dealt with an LOI, you might mistaken this document for a casual expression of interest. In practice, it’s far more important than that, because it spells out the terms under which you’d sell your business if the deal goes through.
If your figures check out, there won’t be a reason to change the sale price. It’ll be what’s spelled out in the LOI, so make sure you’re happy with that number.
Buyers refer to the period after signing an LOI—when the buyer reviews the business in detail—as doing “due diligence.” They’ll learn the ins and outs of your business model and review your financials, to make sure you’re not fudging your numbers. (If the buyer uncovers anything unexpected during due diligence, they might have a reason to suggest a price and terms that differ from what you agreed to in the LOI.)
There’s one more big point to signing the LOI: It defines an exclusivity period for this buyer. During this time, you have to stop marketing your business to other possible buyers, so they have plenty of time to review it and make a decision on whether to purchase.
Don’t know where to start? Watch our one-hour video course, which lays out your options for finding buyers, plus how to increase the value of your business before you sell.
While an LOI is a legal document you should review carefully, on the whole, it’s not legally binding. It is an expression of interest in buying your business, not a commitment to buy it.
The main clause that’s legally binding in an LOI is the exclusivity period. You could be sued if you market your business to other buyers, or try to make a deal to sell to a different buyer, during this buyer’s exclusive review time.
However, don’t make the mistake of signing an LOI and thinking you’ll change the details later. While it’s not a legally-binding commitment, if you make promises to your interested buyer about the price or what’s included in the sale, it’ll be hard to change those later.
That’s why you want to review your LOI closely before signing.
Now that you know what an LOI is, the next question is: How do you write an LOI?
Usually, as the seller, you won’t have to.
Most knowledgeable buyers will have their attorney draft the LOI and send it over for your review. If for any reason your buyer doesn’t present you with an LOI and wants you to draft it, you can find free LOI templates online to get you started, or ask your lawyer for help creating one.
So far, you’ve learned what an LOI is, how legally binding it is, and how it serves as a stepping-stone to your business sale. Now, what could go wrong? Plenty.
Here are some common problems you might run into as a seller with a letter of intent, plus tips on how to avoid them.
These tips come from Andrew Ritter, an attorney who specializes in small-to-mid-market sales at New York-based Wiggin and Dana, as well as business broker Joe Hogg, managing director at business-brokerage firm Global Wired Advisors in Charlotte, N.C.
As you can see, mistakes in your LOI can impact the price and terms of the purchase. Knowing what you’re doing here, or hiring someone who does, can go a long way toward helping you get the best possible exit.
Before you sign on the dotted line, make sure you’re truly ready to take this important step on the road to selling your business.
We’re reporters, not lawyers. If you need help with a legal matter, please hire a lawyer. The information contained in this piece is provided for informational purposes only, and should not be construed as legal advice.
