Beginner Blueprint: What Is a Letter of Intent?
Welcome to Beginner Blueprint - a Murphy’s Musings series for folks just starting to explore the world of buying or selling a business. No buzzwords. No fluff. Just straightforward explanations of the key terms, documents, and decisions you’ll run into along the way. Whether you’re on your first deal (or thinking about it), this is where you build your foundation.
If you’re new to the world of buying or selling a business, chances are you’ve heard the term LOI tossed around. But what exactly is a Letter of Intent, and why does it matter so much?
Let’s break it down, step by step.
What Is a Letter of Intent (LOI)?
In the world of mergers and acquisitions, a Letter of Intent is a document that outlines the basic terms and conditions under which a buyer intends to purchase a business. Think of it as a handshake in writing - it shows serious interest and gets both parties on the same page before diving into deeper negotiations or due diligence (and spending a bunch of time and money in the process).
LOIs are usually non-binding, meaning they don’t legally force either side to go through with the deal. But some parts of an LOI can be binding - like confidentiality and exclusivity (aka “no-shop”) clauses.
What’s the Purpose of an LOI?
An LOI has a few key purposes:
Clarifies Intentions: It gives the seller a clear and concise understanding of what the buyer is offering - including price, structure, timeline, and any key conditions.
Facilitates negotiation: Allows both parties to negotiate key terms without investing significant time or money.
Provides a framework: A signed LOI becomes a guiding document for the purchase and sale agreement, and for all professionals who will be engaged to work on the deal.
Sets the Table for Due Diligence: Once an LOI is signed, the buyer begins due diligence - digging into financials, legal matters, operations, and more to confirm everything checks out before closing.
Why Are LOIs Important for Buyers?
For buyers, the LOI is a chance to:
Set clear expectations upfront about price, terms, and structure (including the formula used to determine the valuation)
Ensure the seller is in agreement on the most important items, before investing time and money into due diligence.
Lock in exclusivity to minimize the risk of losing the deal to a competing offer
Create a framework from which their lawyer can draft a purchase and sale agreement
It’s also a great opportunity to begin building trust with the seller - something that matters a lot in private business sales.
Why Are LOIs Important for Sellers?
For sellers, an LOI:
Helps evaluate whether a buyer is serious and capable (you can learn a lot about a buyer from reading their LOI)
Makes it easier to compare multiple offers if they’re talking to more than one potential buyer.
Flags any major dealbreakers before investing time and money on a deal that just won’t work.
Is the final opportunity to maximize value (after signing, leverage tends to shift towards the purchaser).
How Can Buyers Write a Better LOI?
Know your audience. Smart buyers understand the seller’s priorities and tailor their offer to address them.
Keep it short answer sweet. The best LOI’s are 2 pages MAX.
Minimize “legalese”. The seller should be able read and understand the offer without needing to have their lawyer explain it to them.
Highlight buyer strengths/experience. Smart buyers convince the seller they’re the best option to close a deal AND to continue operating the business.
LOI ≠ Final Deal
Here’s the big takeaway: An LOI is not the final deal. It’s more like a proposal that says, “Here’s how I’d like this to work - are we on the same page?”
It’s a starting point, not a finish line.
Final Thoughts
Whether you’re buying or selling, the Letter of Intent is one of the most important early milestones in a business deal. It lays the foundation for negotiations, protects both parties, and helps keep things moving forward in an organized, professional way.
Starting with a solid LOI can save you stress, time, and costly miscommunication down the road - and that’s something everyone can agree is good business.
Disclaimer: I am (thankfully) not a lawyer, nor am I an accountant. If any of this sounds like legal/financial advice, it's not. Take everything I say with a grain of salt. But not too much - I hear it's bad for your blood pressure.
