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Posted on June 23, 2009

Contributed by KC Choi

How Is A LOI Different Than A Purchase Agreement?


How is a LOI different than a purchase agreement? What should be included in both?

While a purchase agreement is a binding contract with rights and obligations for each party that contains all the terms and conditions of the transaction; a preceding Letter Of Intent (LOI) is often overlooked for its significance. Although non-binding a comprehensive LOI with the same deal points will benefit both the seller and the buyer.  When all major sales terms, key ancillary agreements and important conditions are negotiated and agreed on by both parties they are in a position of much higher degree of success and their true intention of moving forward on the deal. Some of the basic items of a typical LOI should contain purchase price and terms; assets covered and delivery date; due diligence period; closing date; investigation of the business; consulting arrangements with owner or key employees; confidential information; releasing of public information, expenses and conditions  to closing.

When a seller accepts an LOI with the desired deal points he has exercised his strength in an active market with multiple buyers and further reduce opportunity loss of other qualified buyers by removing the business off the market during the due diligence period. The buyer would reduce potential disagreements on open items and the need for renegotiation. And they both would reduce the chance of wasting precious time and incurred expenses. Having an experienced agent will guide you through the entire process, make recommendations and handle the negotiation on your behalf.

About The Author:  KC Choi founder of Power Business Solution, Inc. offers business brokerage services to both buyers and sellers in the Los Angeles and Orange County areas. His business team includes 15+ professionals (multi-lingual) with extensive experience and knowledge with business transactions.  KC can be reached by phone at 714-345-6774.

Watch for more blog posts / articles from me in the future!

See all contributions from KC Choi

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Comments:

I can tell you this--The LOI should specify whether the parties are free to deal with others while working out the details of the LOI. A seller can agree to the terms stated in an Intent Letter, subject to the ability to accept other offers, and can even say that the other offers will have precedence over the agreement reached by LOI if they are offers made by purchase agreement. The other thing I can tell you, from experience, is if there is disagreement between the parties about whether or not the LOI is binding and whether it allows the seller to accept other offers and allows the buyer to drop the LOI and make an offer on another business--if these things are not clearly spelled out in the LOI--and if it goes to court, the judge is going to rule based on what evidence there is from the parties' behavior as to what their intent was. It is a good idea to be specific about intent in writing in the LOI.

Posted by: Steve C.

I found the 1st sentence of the 3rd paragraph difficult to understand but what I think it says is the LOI leaves the seller in a position to accept other offers. Whenever I have seen an LOI it has specifically stated that the seller and broker will not speak to others or market the business during the LOI period. Most LOI's I have seen are poorly drafted and contain a few deal points and are far from inclusive of all deal points and therefore require a lot of negotiation. If drafted properly with appropriate qualifying conditions a Purchase Agreement, like the one available to CABB members, can be highly effective and leave the Seller in a position to entertain other offers up until the Seller's and Buyer's conditions have been satisfied before opening escrow. Because a purchase agreement requires a deposit, which can be refunded in full if conditions are not met it represents a stronger commitment to both buyer and seller.

Posted by: Rick E, BizSeller Inc

When there's a really complicated deal, such as a sale of stock or of a portion, but not all of the company, the principles involved may want their lawyers to actually draft the buy/sell. That means not using a broker-generated offer. But how do they know it's time to do that? Do they agree on price and terms and timing? This is where a letter of intent can come in. The sequence would be an LOI and then a lawyer-written agreement. They'd skip over the standard business purchase contract.

Posted by: David H.

I'm actually of two minds about using the LOI. Advantages: Some buyers like it, feeling they can move quickly on a business they want to buy, get a seller commitment to lock out competitive buyers, without losing the time it takes to get a formal buy/sell contract written (that would come later). And the LOI can be a useful tool for feeling out a seller, find out if they're in the same ballpark, before going to the time and expense to put together a written offer. Downside, though: Does using an LOI instead of a real offer mean the buyer is "just fishing" and not serious? Some brokers -- and sellers -- think that's exactly what it means. And there's a serious question about whether most LOIs can be enforced, if one of the parties who has signed, decides later to back out.

Posted by: Alex Max

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