Deal terms
Writing a letter of intent
A letter of intent sets out the main terms of a deal before anyone pays for lawyers and diligence. It is mostly non-binding, but what you write in it shapes everything that follows.
After a first look at the numbers, a buyer who wants to go further sends a letter of intent. If the seller signs it, the parties move into due diligence and then draft a purchase agreement. The LOI is short, usually two to five pages, and most of it is not legally binding. It is still important, because terms agreed in the LOI are hard to reopen later.
What an LOI usually covers
- Price and how it was reached, ideally tied to the earnings you were shown.
- Structure: cash at closing, bank or SBA financing, any seller note and its terms, any earnout.
- What is being bought: assets or shares, what is included (equipment, inventory, name, phone numbers, website) and what is excluded.
- Working capital: whether an agreed level of inventory or working capital must be delivered at closing.
- Diligence period: how long you have, and what access you need to records, employees and customers.
- Financing contingency: the deal depends on your loan approval.
- Seller transition: how long the seller will stay to help, in what role, and whether they are paid.
- Non-compete: the seller agrees not to compete for a period and area that is reasonable and enforceable where you are.
- Target closing date.
The binding parts
A few clauses are normally binding even though the rest is not:
- Exclusivity (no-shop). The seller agrees not to negotiate with other buyers for a period, often 60 to 90 days. This is what you are really getting by signing.
- Confidentiality.
- Costs. Each side usually pays its own.
Ask your attorney to review the LOI before you send it. A short review now is cheaper than fixing an agreed term later.
Writing it well
Show your reasoning on price. "Based on verified SDE of $165,000 after a $15,000 annual equipment reserve" anchors the discussion on evidence instead of the asking price.
Make the price conditional on what diligence confirms. State that the price assumes the financial information provided is accurate. That keeps the door open if it is not.
Be specific about the seller's transition. "Up to 90 days, 20 hours per week, at no additional cost" avoids disputes.
Settle the seller note early. If any of it will count toward an SBA equity injection, it must be on full standby. See Seller notes.
Keep it short. Detail belongs in the purchase agreement.
Before you send it
- Have you modeled the structure with a realistic salary for yourself?
- Has a lender seen enough to say the deal is financeable in principle?
- Do you know what you will need to see in diligence to keep this price?