Letter of Intent (LOI) in Business Purchase: What You Need to Know

A Letter of Intent is a declaration of intent between buyer and seller. It's essentially "we want to work together under these conditions" – before the heavy purchase agreement is drafted.

The LOI isn't the purchase agreement. It comes first. In the LOI, basic structure is agreed (price, payment terms, rough conditions), then everything gets documented in detail later.

Important: an LOI doesn't necessarily bind both sides – it depends how it's written. Some LOIs are "binding," others "non-binding." This is a critical point.

An LOI normally contains these points:

1. PARTIES AND SUBJECT: "Seller XY wants to sell their GmbH with following business to buyer AB."

2. PURCHASE PRICE: The price. E.g. "€2,000,000 for 100% of shares" or "€1.5M fixed + up to €0.5M earn-out over 2 years." Central number.

3. PAYMENT TERMS: How is it paid? "50% at close via bank transfer, 50% within 30 days after" or "100% at notary."

4. CLOSING DATE: Planned closing. E.g. "Closing to happen by 30 June 2026."

5. EXCLUSIVITY: "Seller won't negotiate with any other buyer for the next 60 days; only with this buyer." Important for buyer because they invest time and money in due diligence and don't want your business offered elsewhere meanwhile.

6. CONDITIONS PRECEDENT: Under what conditions must the deal close? E.g. "No customer loss exceeding 10%," "Buyer's financing secured," "Regulatory approvals obtained if relevant."

7. DUE DILIGENCE: Framework for due diligence. "Buyer gets access to Virtual Data Room," "Buyer can ask X questions," "Due diligence to complete by 1 May 2026."

8. CONFIDENTIALITY: "All information is confidential and can't be shared with third parties (except advisors)."

9. BINDING VS. NON-BINDING: Critical point. Which parts are binding, which not?

10. LEGAL COUNSEL: Who are the lawyers drafting the purchase agreement?

This is the most important point in the LOI:

NON-BINDING LOI: "This LOI is fundamentally non-binding. Only confidentiality and exclusivity clauses are binding." Means: buyer can still change their mind, even after signing. They do due diligence, and if something doesn't fit, they can leave.

BINDING LOI: "This LOI is binding. Buyer commits to paying the purchase price under named conditions." Much stronger – but almost never fully binding, usually with "conditions."

In practice in German-speaking countries, it's often this: LOI is fundamentally non-binding, but "certain clauses" (exclusivity, confidentiality, named purchase price) are binding. Means: you can't talk to other buyers, and the price you agreed to is fixed – unless due diligence reveals something very negative.

The exclusivity clause is great for buyers: "For the next 60 days, you only negotiate with me, not with others." Protects their due diligence investment.

For sellers, it's risky. What if this buyer gets cold feet during due diligence and backs out? Then you're stuck 60 days unable to talk to another buyer – and your best second choice is gone.

How to negotiate this:

• Try to keep exclusivity period short (30 days, not 90).

• Negotiate conditions: "Exclusivity only if buyer actively does due diligence and asks questions. If buyer does nothing for 2 weeks, exclusivity ends."

• Set a "kill clause": "If buyer can't get financing, exclusivity ends automatically."

• Demand earnest money deposit (EMD): "Buyer pays €50,000 to get exclusivity. If buyer backs out without good reason, they lose it." Shows serious intent.

The LOI names a price. But what if, just before sale, a big customer cancels? Does the price drop automatically?

Depends how it's written:

Hard price guarantee: "Purchase price is €2 million, regardless of what due diligence reveals. No adjustments."

Conditional price guarantee: "Purchase price is €2 million as long as top-10 customers represent at least 80% of their prior revenue volume. Below 80%, price = €2M × (customer revenue% / 80%)."

Negotiation: try for hard guarantee. Shows buyer confidence and gives you security. If buyer refuses and wants adjustment clauses, define precisely when price adjusts – and set max discount (e.g., "max 10% price reduction").

In the LOI, your liabilities are often sketched. "Reps & Warranties" means: "You guarantee these statements are true."

Typical reps & warranties in LOI:

• "Company legally exists and is in order."

• "Financial documents are correct and complete."

• "No hidden debts or liabilities."

• "All contracts valid and transferable to buyer."

• "No open litigation or tax procedures."

• "All employees properly employed."

The LOI should hint at these. The detailed purchase agreement will clarify them more. Important: if one of these turns out false later, buyer can sue for damages – so liability risk should be limited (e.g., "Maximum liability €500,000" or "Liability applies only for 18 months post-close").

Mistake 1: signing vague LOI without lawyer. "These are just intentions, I can change later." Wrong. An LOI with binding price and exclusivity is quasi-binding – you need a lawyer.

Mistake 2: accepting exclusivity too long. 90 days is too much. Negotiate down to 30-45 days.

Mistake 3: too many "conditions" in LOI. "Deal is only valid if... if... if..." With too many escape clauses, buyer can easily leave. Minimize conditions.

Mistake 4: no clear price definition. "Around €2 million" isn't enough. Should be "€2,000,000, payable as follows..."

Mistake 5: no lawyer involvement. "We'll do it ourselves, faster and cheaper." Wrong. A good LOI saves you thousands later because it clarifies misunderstandings.

A well-structured LOI shows the buyer you're professional and organized. That increases their trust – and can boost purchase price. But even better: an LOI backed by VOS Assessment.

Means: the LOI says "€2,000,000 purchase price" AND you have a VOS Assessment minimizing risk for the buyer. Buyer can't argue "I still see risk" – because VOS already measured and addressed it.

With strong VOS score (high marks in: financial cleanliness, process documentation, customer diversification, owner dependency reduction), you're positioned even better. Negotiating point: "Look, my business is provably stable and well-structured – VOS shows it. Purchase price should be at high end of range because I show risk is minimal."

Without VOS: an LOI is weaker. Buyer says "Your price is €2M, but I don't see the details. I need earn-out." With VOS: you say "Here's my transparent VOS score – everything measured and validated. Price is fair, earn-out unnecessary." That's a difference of €200-500K.

The smartest path to a strong LOI goes like this:

1. VOS Assessment (now): understand your true transaction readiness.

2. Preparation (3-6 months): address weaknesses VOS report shows.

3. Buyer search (parallel): with improved VOS score, more buyers interested.

4. LOI (with power): buyer sees your VOS score and makes strong offer – no earn-out, fair terms.

5. Sale (successful): rest runs smoothly because prep was solid.

That's the new world: strategy over hope. Data over gut feel. With VALENTYR.