What is a Letter of Intent (LOI) and why do you need one?

When buyers and sellers negotiate a sale, it’s not uncommon for there to be some confusion on the structure of the deal and what it entails. However, this is when a Letter of Intent (LOI) would come in handy to clarify the in-depth details of negotiation. It signals the formal start of the negotiations process, where buyers and sellers collaborate to reach the most feasible deal possible.

In this article, we’ll take you through the process of preparing and accepting an LOI, explaining what it is, why we recommend it, and how to format it. Then, you can quickly find out all the valuable information you can include in this document.

What Is a Letter of Intent?

The Letter of Intent is a legally binding agreement between two parties. It includes the details of one party’s intent to complete a significant transaction with the other, whether they’re buying a home, business, or something else from the other party. The detailed document includes critical elements, such as:

• Opening Paragraph – The first paragraph allows one party to include a statement on the agreement between themselves and the other party. It provides a brief description of the transaction and what it entails.
• Statement of Need – Use this statement to explain why this transaction needs to occur, whether you’re buying a home to live in or investing in a business you plan to take over.
• Transaction Details – The LOI should include details of the transaction, including how and when it will occur.
• Requirements and Timelines – Be sure to include details on the requirements that must be met to complete the transaction, along with any specific timeline put in place to complete steps taken to get to the end goal.

While these are four key elements included in the Letter of Intent, other features added to the document could consist of budget details and credentials needed to complete the project or transaction process.

Why It’s Good to Have a Letter of Intent

It’s beneficial to have a Letter of Intent because it’s a legal document that proves what one party plans to do for another party. It includes the details of any deal made, along with the commitment one party makes to the other in terms of selling something to them or completing a project for them.

Benefits for the Seller

Those selling their homes can benefit from getting an LOI because it lays everything out on the table, including the steps involved in the selling process and a detailed timeline for when everything will be completed.

Benefits for the Buyer

Getting an LOI from the seller allows buyers to feel safer knowing that the seller is in agreement with them and won’t begin striking up deals with other potential buyers.

Both sellers and buyers of homes can benefit from getting the Letter of Intent to protect themselves and the investment they’re looking to buy or sell.

Why Is the Letter of Intent Useful in Business Negotiations?

The LOI is useful in business negotiations, especially when buying and selling businesses, because it helps with the negotiation process and prevents miscommunication. The document ensures that both parties are on the same page before completing the transaction so that there are no discrepancies or misinterpretations involved.

How to Format an LOI

It’s crucial to format the LOI correctly. The top of the page should address the person for whom it’s for and then state that the letter sets forth the proposed terms of the buyer’s purchase of assets belonging to the seller. It must include pertinent details, such as:

• Execution Date
• Subject Property 
• Definitive Agreements
• Due Diligence
• Suitable Financing
• Expenses
• Confidentiality
• Miscellaneous

(You can find a list of definitions at the bottom of this post, including definitions for some of the above terms.)

At the end of the document, it’s necessary to sign and date it while including a list of any purchased assets. 

The Letter of Intent is a must-have when buying and selling assets, such as businesses. It’s one legal document you don’t want to avoid obtaining when completing such a significant transaction.

You can download Flippa’s LOI template here and simply fill in the buyer and seller details, business name, and the terms and conditions you want to put in place for the negotiation.

Terms and Definitions

• Execution Date: The period from the date of the LOI for the buying party to review the Business and the Assets with financial and operational data that the seller party shall provide.
• Due Diligence Period: The period from the date of the LOI for the buying party to review the Business and the Assets with financial and operational data that the seller party shall provide.
• Purchase Price: The purchase price is the total value of the transaction, including assets such as inventory (if applicable).
• Miscellaneous: Other terms, details of the deal, like payment structure, can be defined in the this section.

Now that you have a clear understanding of an LOI, you’re ready to find a digital asset and start negotiations.