When and how to submit a Letter of Intent (LOI)
October 9, 2023 ⋅ 4 min read
If you're reading this, you may be deep in the process of buying a small business, or you may be researching how to run a smooth sales process. Either way, you're in the right place! This article will tackle everything you need to know about submitting a Letter of Intent (LOI).
Hint: Read to the end to download our free template!
What is an LOI?
A Letter of Intent (LOI) is a formal document that a prospective buyer submits to a seller (often through a broker) to express their serious interest in purchasing the seller's business. The LOI outlines the basic terms and conditions of the proposed transaction and serves as a starting point for negotiations between the buyer and the seller. LOIs are mostly non-binding but can include legal clauses, for instance, stating that the seller must take the business off the market upon acceptance of the LOI or stating that the buyer has to pay some earnest money upfront.
Why is the LOI important?
Think of the LOI as your opening statement in the metaphorical courtroom that is a business transaction. It outlines your serious intent, showcases your commitment, and provides a roadmap for the journey ahead. Usually, if executed, it will also take the business off the market and kick off an intense diligence period. At a high level, the LOI ensures that you generally agree on the terms of a deal.
When do I submit an LOI?
Once you've conducted thorough preliminary diligence on the business and have familiarized yourself with the industry, if you're feeling confident about acquiring the business, it's time to consider submitting an LOI.
This typically follows 1-3 meetings with the seller, possibly including an in-person encounter. While there isn't a definitive right or wrong time to submit an LOI, it's essential to keep in mind that owners generally prefer a swift process.
What makes a compelling LOI?
A compelling LOI is the linchpin of your business acquisition strategy. Start by ensuring your offer price and terms are fair and competitive, showcasing your understanding of the business. Clearly define your timeline, emphasizing the urgency of due diligence and closing deadlines. The inclusion of binding terms in the LOI, such as taking the deal off the market or even some earnest money, adds weight to your proposal. You’ll want to include how much money you plan to pay, including the amounts of down payment, any seller financing or earnouts, etc.
Check out Baton's LOI template for an example of what to include.
Submitting the LOI
Typically, LOIs are submitted via email, either through the broker or directly to the seller, with the broker copied.
With the LOI in the hands of the seller, be prepared for a range of responses, from outright acceptance to counteroffers. This marks the beginning of negotiations and potential revisions to the initial terms. The ultimate goal is to secure a signed LOI.
After the LOI is signed
Once the LOI is signed, the focus shifts to due diligence. This phase is crucial, involving a deep dive into the business to ensure it aligns with your expectations. Simultaneously, efforts should be directed toward finalizing the sale contract, which brings the terms agreed upon in the LOI and following negotiations to the closing table.
The LOI is not a mere formality; it's a profound declaration of intent in the business world. Its significance cannot be overstated. As you navigate through the intricacies of small business acquisition, approach the submission of an LOI with diligence, professionalism, and a hint of entrepreneurial spirit.
In small business M&A, it's typical to see 50% of deals fall apart after having a signed LOI, so to avoid wasting time, you’ll want to make sure you feel confident about the business and are excited about the opportunity before going through the effort of submitting an LOI.
While an LOI may look different depending on your unique situation and the deal at hand, we've created an LOI template to get you started. Happy hunting!
Have questions? We're here for you - shoot us a note at email@example.com.