You have found a business you want to buy. The financials look right, the operations make sense, and the seller is willing to talk. Before you spend tens of thousands of dollars on lawyers and accountants conducting due diligence, you need one document that sets the entire transaction in motion: a letter of intent.
A letter of intent to purchase a business defines what you are buying, what you are paying, and the rules of engagement for everything that follows. Get it right and you enter negotiation with clarity and protection. Get it wrong and you give away your position before deal-making starts.
A letter of intent -- commonly called an LOI -- is a written document that outlines the key terms of a proposed business purchase before the parties commit to a definitive purchase agreement. It tells the seller: here is what I am willing to pay, here is how I want to structure the deal, and here are the conditions that must be met before I will close.
Most of the LOI is non-binding. The buyer and seller are not legally obligated to complete the transaction just because they signed one. But certain provisions -- typically confidentiality, exclusivity, and the allocation of transaction costs -- are binding from the moment both parties sign.
This hybrid structure is what makes the letter of intent useful. Both sides can test the waters on price, structure, and timeline without locking themselves into a deal they have not fully investigated.
It sets the framework for negotiation. Once both parties agree on the core terms in the LOI, those terms become the baseline for the purchase agreement. Trying to renegotiate a term you already agreed to in the letter of intent is difficult and damages trust.
It establishes exclusivity. A well-drafted LOI includes an exclusivity period that prevents the seller from negotiating with other buyers while you conduct due diligence. Without it, you could spend months investigating the business only to lose the deal to a competing buyer.
It identifies deal-breakers early. The LOI forces both parties to address the fundamentals -- purchase price, structure, key conditions -- before anyone invests significant time or money. If the buyer and seller cannot agree on the basics, better to find out now than after months of due diligence.
It signals seriousness to the seller. A detailed letter of intent tells the seller you are an organized buyer who has done your homework and will actually close.
Every LOI is different, but a letter of intent to purchase a business should address these core elements.
State the total purchase price and how you intend to structure the transaction. The two primary structures are an asset purchase (you buy specific assets and assume specific liabilities) and a stock purchase (you buy the seller's ownership interest in the entity).
Buyers generally prefer asset purchases because they can select assets, avoid unknown liabilities, and get a stepped-up tax basis. Sellers generally prefer stock deals for the opposite reasons. If any portion of the price involves seller financing, earnouts, or escrow holdbacks, spell that out. Ambiguity on payment structure creates friction later in the negotiation.
Define the due diligence period -- typically 30 to 90 days -- during which the buyer investigates the business: financial statements, tax returns, contracts, employee records, intellectual property, litigation history, and regulatory compliance.
Be specific about access. The seller should agree to provide complete records and make key employees available for questions. Vague due diligence provisions invite disputes.
The LOI should also give the buyer the right to terminate the agreement if due diligence reveals material problems. This walk-away right is one of the most important protections in the entire document.
The exclusivity period prevents the seller from soliciting or negotiating with other potential buyers for a defined period -- usually 60 to 120 days. This is almost always a binding provision.
Without exclusivity, the seller can use your offer as leverage with competing buyers. Every serious letter of intent should include an exclusivity clause with a clear time frame and consequences for breach.
Both parties should agree to keep the LOI terms and all information exchanged during negotiation and due diligence confidential. This protects the buyer's interest, the seller's operations (employees and customers may react poorly to news of a potential sale), and any proprietary information shared during the process.
If the parties have already signed a standalone NDA, the letter of intent should reference it. If not, the confidentiality provision in the LOI itself should be binding.
List the conditions that must be satisfied before closing: satisfactory due diligence, accuracy of the seller's representations and warranties, receipt of required third-party consents, absence of material adverse change, and securing financing if applicable. If any condition is not met, you have the right to walk away.
Include a proposed closing date or timeline from LOI to purchase agreement to closing. Most business acquisitions close 60 to 120 days after the LOI is signed, depending on deal complexity and scope of due diligence.
The LOI must clearly state which provisions are binding and which are non-binding. Without clear language on this point, you risk a court interpreting the entire LOI as a binding agreement to purchase the business.
This is where many buyers and sellers get confused, and where poorly drafted letters of intent create the most problems.
Non-binding terms include the purchase price, deal structure, representations and warranties, closing conditions, and most substantive deal terms. The parties are agreeing to negotiate toward a deal on these terms, not committing to them.
Binding terms typically include confidentiality, exclusivity, allocation of transaction expenses, governing law, and the provision stating which terms are binding and which are not.
The critical mistake is making the entire LOI binding. If you sign a binding letter of intent with a specific purchase price and closing date, a court may hold you to those terms even if due diligence reveals serious problems. Every LOI should include explicit language: "Except for [list of binding provisions], this Letter of Intent is non-binding and does not create any legally enforceable obligation on either party to consummate the transaction described herein."
Making the entire LOI binding. This eliminates the flexibility that makes the LOI useful and can lock you into a deal you have not investigated.
Skipping exclusivity. Without it, you have no protection against the seller shopping your offer. The investment you make in due diligence is wasted if the seller accepts a better offer while you are still investigating.
Vague due diligence provisions. An LOI that says "buyer will have a reasonable period to conduct due diligence" without specifying time frame, scope, or access rights is an invitation for disputes.
No walk-away rights. The LOI should clearly state the buyer can terminate if due diligence is unsatisfactory, without having to prove the problems rise to some undefined level of materiality.
Ignoring the transition. Will the seller continue operating the business in the ordinary course between signing and closing? Are there restrictions on major decisions? A brief reference to transition terms in the LOI sets expectations early.
The letter of intent is the starting line, not the finish line. Here is the typical path from LOI to closing in a business purchase.
Due diligence. The buyer conducts a thorough investigation -- financial, legal, operational, and regulatory -- verifying everything the seller represented and identifying risks that were not apparent from the outside.
Definitive purchase agreement. Based on due diligence results and the LOI framework, the parties negotiate a binding purchase agreement with detailed representations and warranties, indemnification provisions, and all terms the LOI outlined in summary form.
Third-party consents. Many business purchases require consent from landlords, customers, vendors, lenders, or regulatory bodies. Start early -- these take time.
Closing. The buyer pays the purchase price, the seller transfers the business, and both parties execute closing documents. Post-closing tasks include employee notifications, customer communications, and integration.
If you are buying or selling a business in Connecticut, a few state-specific issues deserve attention.
Bulk sales. Connecticut has adopted bulk sales provisions under the UCC (Conn. Gen. Stat. Section 42a-6-101 et seq.). In an asset purchase, the buyer may need to comply with bulk transfer notice requirements to protect the seller's creditors. Failure to comply can expose the buyer to creditor claims.
Asset vs. stock tax implications. Connecticut imposes sales tax on transfers of certain tangible personal property in asset deals. Deal structure affects state tax obligations, and the LOI should reflect this.
Contract assignments. Connecticut law generally permits assignment unless the contract prohibits it or the assignment materially changes the other party's obligations. Identify contracts requiring consent early in the LOI process.
A letter of intent is not just paperwork. It defines the terms, protects your position, and sets the pace for the entire acquisition. Whether you are making your first business purchase or your tenth, the LOI deserves the same careful attention as the purchase agreement that follows it.
At Turley Law, we represent buyers and sellers in business acquisitions across Connecticut, structuring transactions from the initial LOI through closing. If you are considering a business purchase and want to make sure your letter of intent protects your interests, schedule a consultation with our business law team.
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