What is letter of intent?

For buyers assessing a business or franchise, an LOI is your first formal step past initial discussions to signal serious intent. It lays out the proposed purchase price, deal structure (e.g., asset purchase vs. stock purchase), financing contingencies, due diligence period, and exclusivity. Having these foundational terms agreed upon, even non-bindingly, saves both parties significant time and legal fees down the line by confirming alignment on the core economics before committing to comprehensive legal documents.

The LOI is pivotal because it kicks off the formal due diligence phase, granting the buyer exclusive access to the seller's financial, operational, and legal records. A well-crafted LOI protects the buyer by specifying conditions that, if not met during due diligence (e.g., discrepancies in financials or undisclosed liabilities), allow for pulling out of the deal without penalty. For sellers, it's a valuable commitment, often including a 'no-shop' clause, preventing them from entertaining other offers while due diligence proceeds. Negotiating it effectively sets the stage for the rest of the transaction.

A common misconception is treating the LOI as legally binding on all terms. While specific clauses like confidentiality, exclusivity, and governing law are typically binding, the core economic terms (purchase price, structure) are generally non-binding. This flexibility allows buyers to extensively investigate the business through due diligence without being fully committed to the initial offer. Another mistake is underestimating the LOI's importance; poorly defined terms can lead to significant friction and renegotiations later, even derailing the deal entirely.