LOI (Letter of Intent)

A Letter of Intent (LOI) is a preliminary agreement between a potential buyer and seller that outlines the key terms of a proposed business acquisition. It serves as a roadmap for negotiations and establishes mutual understanding before entering formal due diligence.

Purpose and Importance

The LOI serves several critical functions in the M&A process:

Establishes Framework

Documents key commercial terms (price, structure, timeline)
Sets expectations for both parties before significant time investment
Provides reference point for final purchase agreement negotiations

Secures Exclusivity

Typically includes 60-90 day exclusivity period
Prevents seller from entertaining other offers during due diligence
Gives buyer protected time to complete thorough business review

Risk Management

Identifies major conditions and contingencies upfront
Reduces likelihood of deal breakdown in later stages
Establishes clear path to closing

Key Components

A comprehensive LOI typically addresses:

Purchase Price Structure

Base purchase price and valuation methodology
Cash vs. seller financing breakdown
Working capital adjustment mechanisms
Earnout provisions (if applicable)

Transaction Structure

Asset purchase vs. stock purchase election
Assumed liabilities and exclusions
Key employee retention requirements
Non-compete and consulting agreements

Conditions to Closing

Due diligence scope and timeline (typically 30-60 days)
Financing contingencies and requirements
Regulatory approvals or third-party consents
Material adverse change provisions

Process and Timeline

Exclusivity period duration
Due diligence milestone dates
Target closing date
Confidentiality and non-disclosure requirements

Common Deal Terms

Purchase Price Multiples

3-5x EBITDA for most SMB transactions
2-4x for asset-heavy or cyclical businesses
4-6x for high-growth or recurring revenue businesses

Working Capital

"Peg" to historical average (typically trailing 12 months)
Dollar-for-dollar adjustments above or below peg
Cash and debt-free basis most common

Seller Financing

10-30% of purchase price carried by seller
3-7 year terms at market rates
Often subordinated to bank debt

Binding vs. Non-Binding

Most LOI provisions are non-binding, meaning either party can walk away. However, certain sections are typically binding:

Binding Elements:

Confidentiality and non-disclosure obligations
Exclusivity period and no-shop provisions
Good faith negotiation requirements
Expense allocation (each party bears own costs)

Non-Binding Elements:

Purchase price and commercial terms
Closing conditions and timeline
Final transaction structure

Common Pitfalls

Over-Negotiating the LOI

LOI should establish framework, not final terms
Excessive detail can delay progress and create false precision
Focus on major deal points, leave minor terms for definitive agreement

Unrealistic Timelines

Due diligence typically requires 45-60 days minimum
Factor in financing approval time (30-45 days for SBA loans)
Holiday periods and seller availability constraints

Vague Conditions

Ambiguous language creates confusion later
"Satisfactory due diligence" should define scope and standards
Material adverse change thresholds should be quantified

Best Practices

For Buyers:

Include robust due diligence scope and timeline
Specify financing contingencies and backup plans
Build in valuation adjustment mechanisms for discoveries
Request seller representations and warranties preview

For Sellers:

Negotiate reasonable exclusivity period (60-90 days maximum)
Include buyer qualification requirements
Specify expense caps for due diligence costs
Retain right to terminate for buyer financing failure

Post-LOI Process

Once signed, the typical process includes:

Due Diligence Launch (Day 1-45)
Purchase Agreement Drafting (Day 15-30)
Financing Applications (Day 15-45)
Purchase Agreement Negotiation (Day 30-60)
Closing Preparation (Day 60-90)

A well-crafted LOI can mean the difference between a smooth transaction and a deal that falls apart. Experienced M&A attorneys typically charge $5,000-$15,000 to draft comprehensive LOIs for SMB transactions.