What Goes in a Letter of Intent to Buy a Business

A letter of intent (LOI) is a short letter that sets out the main terms of a purchase before the attorneys draft the purchase agreement. Most of it is non-binding. Its job is to get both sides to agree on the deal they are about to spend money documenting, and to give the buyer time and exclusivity to check the business.

If you are financing with an SBA loan, several of its terms have to fit SBA rules. It is far easier to get those right in the letter than to renegotiate them once the lender reads it.

Price, structure and what is included

State the price and how it will be paid: cash at closing (your money plus the loan), and any seller note. Say whether you are buying the assets or the stock of the company, and in an asset purchase list what is included (equipment, inventory, goodwill, the name, customer lists) and what is not (usually cash and receivables, unless you agree otherwise). Both structures can be SBA financed (stock or asset purchase).

Make the purchase contingent on your financing. Lenders expect it, and it protects you if the loan is not approved.

The seller note

If the seller is carrying part of the price, state the amount, rate and term. If you need that note to count toward your down payment, it has to be on full standby (no payments of principal or interest for the life of the SBA loan), and it can cover at most half of the required injection (the seller note rule). Confirm the terms with your lender before the letter goes out. Sellers often expect payments to start sooner.

No earnouts

Earnouts, where part of the price is paid to the seller only if the business hits targets after closing, are prohibited in an SBA change of ownership. A working capital adjustment at closing is allowed (the earnout rule). If you and the seller disagree on value, a seller note on standby is the usual bridge.

Diligence period and exclusivity

Set how long you have to complete due diligence and obtain financing, and that the seller will not negotiate with anyone else in that time. This is one of the few binding sections. Give yourself enough time for the lender's valuation and reports, which run on their own schedules. Our due diligence checklist is the document request to send once it is signed.

The seller's role after closing

In a full buyout, the seller cannot stay on as an owner, officer or employee, but the business can contract with them as a consultant for a transition period of up to 24 months in total. In a partial buyout, the seller can stay on as an owner and employee (the seller rule). Write the transition period to fit.

Agree that the seller will sign a non-compete, with the details left for the purchase agreement. A 7(a) loan can finance an agreement not to compete as part of the purchase (the non-compete rule).

The binding parts

Say which sections bind both sides even though the rest does not: usually exclusivity, confidentiality, who pays which costs, and governing law. Have your attorney read the letter before you send it.