Selling a business is a many step process. Geez, just getting the business ready to be sold takes plenty of work! Some brokers think that, once all the preliminary work is done – the valuation, the listing, the preparation of the Offering Memorandum, the abstract, the marketing plan, etc., etc, – the actual selling process is easy. Well, it ain’t so, Bucko. The selling process is… well, a process in its own right. From where to market the business to how to get the deal financed, there are many major aspects from start to finish of the selling process. But there are also plenty of small issues that you’ll hit along the way. One of them – and one that we get a lot of questions about – is the deal’s letter of intent or term sheet. I spend time in our online course discussing when to use a letter of intent (“LOI”) and some of the issues it should address but we often receive questions about the LOI from both participants in the course as well as from existing brokers and general readers. LOIs are seldom used in the purchase and sale of the smallest Main Street businesses. On the other hand, they are generally employed in larger deals and nearly always part of any lower Middle Market acquisition.

What is a Letter of Intent?

For those of you that don’t know, a letter of Intent is a document outlining one or more aspects of an agreement – or, rather, an anticipated agreement – between two or more parties before all the agreement’s terms and conditions are finalized. Some brokers use the phrase “term sheet” in place of the LOI or even a memorandum of understanding (“MoU”) but all are generally used as an initial document to govern an anticipated material transaction. Many LOIs include confidentiality or non-disclosure agreements (NDAs), which contractually stipulate the components of any deal – or discussions of any deal – both parties agree to keep confidential. Many LOIs also feature no-solicitation provisions, which forbid the parties from poaching the other party’s employees.

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Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to market and sell businesses.

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LOIs resemble short, written contracts, but they are generally not contracts insofar as they are not, with the possible exception of any aspects relating to confidentiality and employee poaching, binding on the parties.They are mercifully free of all the legal jargon that a final, binding agreement will contain.