What’s in a Letter of Intent? A Guide for Business Buyers and Sellers

When someone is considering buying or selling a business, one of the first documents they may encounter is a letter of intent. This document is a preliminary outline of the transaction that both parties use to communicate key terms before drafting a formal contract. While it doesn’t finalize a deal, a letter of intent can influence negotiations and set expectations early in the process.

A letter of intent isn’t binding in most cases, although certain provisions can carry legal weight. Buyers and sellers often use it to confirm that they’re seriously considering the transaction and to highlight terms they expect to see in a formal agreement. 

The Harding Law Firm, with offices in Griffin, Georgia, assists clients throughout Spalding County, Butts County, Monroe County, Lamar County, and Henry County. Attorney Todd A. Harding works closely with business buyers and sellers to outline key terms and guide preliminary agreements through a letter of intent.

If you’re preparing to buy or sell a business, don’t wait to get legal guidance. Reach out to The Harding Law Firm today for help with a letter of intent and the next steps in your transaction.

Common Elements Included in a Letter of Intent

A standard letter of intent usually contains several main sections. These help clarify the intentions of both parties and provide a reference point as the deal progresses. The most common elements include:

Identification of parties: The document should list the buyer and seller with full legal names and business information. This eliminates confusion about who is involved in the transaction.

Transaction description: A brief overview of the proposed sale, including the type of business interest being purchased, whether assets or stock, and any significant assumptions.

Purchase price and payment terms: While not final, the letter typically outlines the expected price and method of payment. This section can include cash, financing, or installment arrangements.

Due diligence: Buyers often want access to financial records, contracts, and other documents. A letter of intent may outline the scope and timing of this review.

Confidentiality and non-disclosure: Many letters include provisions that restrict sharing sensitive information obtained during negotiations.

These elements give both parties a reference point for further discussion and can prevent misunderstandings before formal agreements are drafted.

Binding and Non-Binding Provisions

A letter of intent generally separates binding and non-binding provisions. Most sections are non-binding, meaning either party can walk away without legal penalty. For example, the overall purchase price or transaction description is usually non-binding. This allows buyers and sellers to discuss terms openly without committing prematurely.

Certain clauses, however, may carry binding obligations. Confidentiality agreements, exclusivity periods, or limitations on soliciting employees are often enforceable. Buyers and sellers should clearly distinguish which parts of the letter of intent are intended to carry legal weight. This distinction helps prevent disputes if the transaction doesn’t proceed.

Considerations for Buyers and Sellers

Before signing a letter of intent, both buyers and sellers should carefully review the proposed terms. The Harding Law Firm notes that buyers often focus on financial performance, liabilities, or pending contracts. At the same time, sellers may concentrate on the proposed price, payment timing, and any conditions for completing the sale.

The letter of intent also provides a chance to ask questions about the transaction. Buyers can request additional information, and sellers can clarify expectations about operational responsibilities during negotiations.

How a Letter of Intent Guides Negotiations

While a letter of intent doesn’t finalize a deal, it can significantly influence negotiations. It provides a starting point for discussing the structure and timing of a transaction. Parties often refer back to the letter as they draft purchase agreements, sometimes incorporating key terms from it into the final document.

A well-drafted letter of intent can also help align expectations. Listing major terms reduces the likelihood of surprises in later stages. Buyers and sellers can focus their discussions on areas that matter most, such as price adjustments, contingencies, or transition of management.

Common Mistakes to Avoid

Even though a letter of intent is preliminary, errors can create confusion or conflict. One common mistake is failing to specify which provisions are binding. Buyers and sellers should mark clearly any enforceable obligations to avoid disputes.

Another mistake is leaving out important financial or operational details. Omitting information about liabilities, inventory, or contracts can create disagreements later. Parties should strive to include the essential terms that shape the deal without turning the letter of intent into a formal contract.

Finally, some buyers or sellers assume that a letter of intent commits them to the transaction. Misunderstanding its non-binding nature can lead to unrealistic expectations or unnecessary pressure during negotiations.

Moving From Letter of Intent to Purchase Agreement

Once both parties agree on the terms outlined in a letter of intent, they typically proceed to draft a formal purchase agreement. The purchase agreement converts the expectations from the letter into a legally enforceable contract. This final document includes details such as the payment structure, representations and warranties, closing conditions, and remedies for breach.

Although a letter of intent doesn’t replace the purchase agreement, it often serves as a useful guide. By recording preliminary terms in writing, buyers and sellers can approach the drafting of the purchase agreement with clarity about what has already been discussed.

A letter of intent is an essential early step in buying or selling a business. It communicates preliminary terms, outlines expectations, and can shape future negotiations. 

Buyers and sellers should pay attention to what is binding, what remains negotiable, and how the letter reflects their goals. With careful drafting and review, a letter of intent can provide a clear starting point for a successful transaction.

A letter of intent can help clarify expectations and outline preliminary terms for a business transaction. For buyers and sellers, the key isn’t just drafting the document but understanding how it reflects their goals and obligations. With careful legal guidance, both parties can approach negotiations with greater confidence and clarity.

Contact a Business Attorney for Guidance Today

If you’re buying or selling a business in Griffin, Georgia, or in Spalding County, Butts County, Monroe County, Lamar County, or Henry County, don’t handle the process alone. Reach out to The Harding Law Firm today for assistance with a letter of intent and support from an attorney who will protect your interests throughout the transaction.