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BUYER'S GUIDE

Letter Of Intent (LOI) When Buying A Business Or Commercial Property

A letter of intent (LOI) is an essential document when the purchase of a business or commercial property is being considered. Simply stated it is a relatively short document that details a purchaser's intention to buy a business or commercial property and outlines a variety of details that are involved in the potential purchase. Typically, the LOI is a non-binding agreement, but it would be prudent to outline some potential escapes if information is revealed that would prevent the eventual sale. The letter of intent can be used to accomplish several objectives.

  • It signifies an intention to buy, while not legally obligating the potential purchaser.
  • It enables the potential purchaser to obtain information about the business or commercial property in a more formal atmosphere than a simple conversation or discussion.
  • It should include a provision that further discussions with other potential purchasers are forbidden and therefore ties up the property for further analysis. Normally this provision is for a period of 90 days.
  • It provides a basis for further in-depth discussions about the purchase prior to the completion of a formal sales contract.
  • It signifies that there is a degree of seriousness about the potential purchase other than just a simple inquiry.
  • It provides some insight into the flexibility of the seller to be amenable to specific sale terms and conditions.
  • It includes provisions that can be incorporated into the binding formal sales contract, which saves fees for work performed by lawyers.

The following provisions as a minimum should be included in the LOI:

  • The purchase price which should include the down payment and any detailed financing arrangements that are part of the sale.
  • A description of the property and a listing of the assets that are being sold and it should address any exceptions that are negotiated. It should also address any receivables and how they are to be handled.
  • A confidentiality agreement that prohibits each party from disclosing the potential sale or any information that is revealed during the negotiations.
  • As previously mentioned, the LOI should prohibit negotiations with another party concerning any potential sale for a set period of time.
  • An agreement that prohibits the seller from entering into any business that would directly compete with the business that is for sale.
  • Any contingencies that would prevent the deal from going forward, such as the lack of the seller being able to negotiate acceptable financing or any subsequent disclosures that would place the price or worth of the property or business in question.
  • An agreement that the potential purchaser will assume any expenses incurred by the seller in completing the LOI even if the potential sale is not consummated.
There are obvious advantages for the buyer to insure that a letter of intent is completed as soon as it becomes apparent that the likely sale of a business or commercial property will take place. The LOI serves to secure the confidentiality of the potential transaction and provides time for the potential purchaser to insure that business or commercial property is actually worth the proposed selling price.


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