How to Buy a Business – What is a Letter of Intent?

When buying a business you should always sign a letter of intent. So, what is a letter of intent…or LOI, for short? A letter of intent is a written offer which underscores your interest in a particular business.  The benefits of having a letter of intent are explained in this video…

A letter of intent typicaly includes what is called a No Shop Clause which prevents the seller from “shopping” the business for a two week period while you, the buyer, are doing your due diligence.

So, the letter of intent provides you with the security that you can conduct your due diligence thoroughly and that the business will not be sold out from under your nose during that period of time.

A letter of intent also acts as a guideline that both the seller and the buyer use to structure the deal. Letters of intent are really great because you hand them off to your lawyers and the lawyers know exactly what the deal is. There is no guess work.

Years ago buyers and sellers didn’t have a formal process in the letter of intent process. We would send the seller off to his lawyer and we’d send the buyer off to his lawyer and when they both came back with the deal, it was completely different in terms and price than what they had all agreed on.

Therefore, the letter of intent acts like the “pre contract” of what everybody agrees on what the deal should be. Then everybody has time to take a deep breath, do their due diligence, look under the covers, figure out what the business is, and make sure that the seller can prove all his representations to you. But he can’t sell the business out from underneath you to somebody else because he has a No Shop Clause in the letter of intent.

Typically we take a five thousand dollar good faith deposit, Vested will hold that deposit for you and if, for any reason, you are uncomfortable with that particular deal you will get refunded that money.

Do you have any questions about letter of intent or how to buy a business? If you do then call Vested Business Brokers today at (877) 735-5224 to get all your questions answered by an experienced business broker.

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