Business negotiations don’t happen out of the blue; the parties involved will meet and talk beforehand, and eventually, one party will send a letter of intent.

 

Letters of intent (LOIs) are a key part of almost any business deal; the LOI defines key terms of the prospective agreement so that all parties have a better understanding of where the others stand before due diligence and more formal negotiations begin.

 

At Catchfire, we can help you create a letter of intent when you want to buy a business, or review letters of intent if you’re the seller. 

Key Takeaways

  • Letters of intent are not definitive agreements; they are preliminary documents to express serious intent to engage in a transaction.
  • A Letter of Intent is the buyer’s offer.  It is the best way to get to due diligence where a more detailed review of the company’s records will be undertaken.
  • Some sections of a letter of intent, like non-disclosure, can be legally binding, though in our view, if accepted, it is the foundation of the deal.
  • Letters of intent are most commonly used in M&A and joint venture agreements. 
  • Catchfire can help you create, review, and understand letters of intent, whether you’re buying a business or looking to sell your business.

Understanding An LOI

A letter of intent (LOI) is a document used to declare one party’s intention to do business with another party. In most cases, it’s used by one business or business owner to declare their intent to purchase another business.

 

LOIs are somewhere between a handshake agreement and a legally binding document. A party that expresses interest with an LOI is not bound to make a deal with another party, but it does show that they’re serious about the prospect of negotiating a deal. 

 

Though most parts of an LOI may not be legally binding, some sections - like non-disclosure agreements (NDAs) - may indeed be legally binding. Those sections make LOIs legal documents, so they should be reviewed carefully before being sent.

 

The goal of an LOI is for two or more parties to reach a mutual understanding before more detailed negotiations begin; think of it as a way of setting the commercial terms of the deal and initiating the due diligence process. When a company sends an LOI, it’s expressing serious intent to engage in a transaction; getting it right, whether you’re the sender or the receiver, is crucial if you want that transaction to go smoothly. 

What’s Included In An LOI

The format of an LOI can vary, but most will contain:

 

  • Contact information
  • An introduction
  • The purpose of the LOI (the potential transaction in question)
  • The proposed structure for the transaction
  • Key terms to be negotiated
  • A call-to-action
  • A closing statement

 

Your goal when sending an LOI is to express how serious you are about acquiring another business or engaging in a joint venture with them.  You can think of an LOI as a preliminary agreement that, while not legally binding, will set the foundation for the purchase agreement. 

 

When receiving an LOI, your goal is to evaluate both the seriousness of the party that sent you the letter and to look at the key terms and evaluate what you are willing to negotiate on.

 

In Catchfire’s process we endeavour to bring a seller of a business multiple LOI’s from which they will select the best fit.  It’s important to bear in mind that both quantitative and qualitative aspects will be considered when the selection is made. 

Purpose And Applications Of An LOI

Mergers & Acquisitions

Mergers and acquisitions (M&A) are the most common use case for LOIs. Want to show that you’re serious about buying a business? Issue an LOI. Doing so demonstrates that:

 

  • You’ve thought about price and due diligence.
  • You want to avoid competing with other businesses (if you ask for exclusivity).
  • You’re ready to move on to the more sensitive parts of the process (and you’re willing to sign NDAs to keep things moving forward).

 

Though most parts of an LOI are not legally binding, but they do represent the agreed upon commercial terms of the agreement between the parties, assuming no material issues arise during due diligence. Do not send an LOI if you’re not serious; you’ll be wasting a lot of people’s time. 

How Catchfire Can Help You!

As M&A Advisors, our goal is to make buying or selling a business as easy as possible for you; it’s never a stress-free process, but to take some of the stress off your shoulders. We can:

 

  • Create an LOI with you
  • Review and Assess LOIs with you
  • Help you negotiate the terms of the LOIs you receive
  • Give you the tools to prepare for due diligence after you sign an LOI

 

Ready to begin? Contact us today; you won’t need an LOI to start working with us!