Question 1

What is a Letter of Intent (LOI)?

Accepted Answer

A Letter of Intent is a document outlining the key terms of a proposed business acquisition before a binding purchase agreement is drafted. It typically covers purchase price, deal structure, due diligence period, contingencies, and timeline. Most LOIs are non-binding except for confidentiality and exclusivity provisions.

Question 2

Is an LOI legally binding?

Accepted Answer

Most LOIs are intentionally non-binding, meaning either party can walk away. However, certain provisions like confidentiality, exclusivity (no-shop clause), and the obligation to negotiate in good faith are often binding. Always have an attorney review your LOI before signing or sending.

Question 3

What should be included in a business acquisition LOI?

Accepted Answer

A comprehensive LOI includes: purchase price, deal structure (asset vs stock sale), payment terms, earnest money deposit, due diligence period and scope, contingencies (financing, lease, etc.), non-compete terms, transition/training period, timeline to closing, and confidentiality provisions.

Question 4

How much earnest money should I put in an LOI?

Accepted Answer

Earnest money deposits for business acquisitions typically range from 1% to 5% of the purchase price, or $5,000-$25,000 for smaller deals. The deposit shows serious intent and is held in escrow. It is typically refundable if contingencies are not met and applied to the purchase price at closing.

Question 5

How long should the due diligence period be?

Accepted Answer

Due diligence periods typically range from 30 to 90 days, with 45-60 days being most common. Larger or more complex businesses may need longer. The period should be long enough to thoroughly review financials, legal documents, operations, and obtain financing approval.

Question 6

Should I submit an LOI before or after seeing financials?

Accepted Answer

It depends on the situation. Some sellers require an LOI before sharing detailed financials (especially through brokers). Others share a Confidential Information Memorandum (CIM) first. Ideally, you should see enough financial information to make a reasonable offer, with full verification happening during due diligence.

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