An LOI should establish the intended economics and process clearly enough to identify major disagreements before deeper diligence. Have counsel review it before signing: confidentiality, exclusivity, expenses or other provisions may be binding even when the proposed acquisition is not.
In this guide
Define the parties and asset scope
Name the proposed buyer and seller entities and identify who has authority to act. Describe the operating assets, locations, real estate and exclusions. If the property owner differs from the business owner, include that distinction in the process.
State the proposed transaction form and the treatment of debt, cash, inventory, customer obligations and working capital. A phrase such as business purchase can conceal material differences in what each side expects to transfer.
Read the LOI as a set of decisions
Read the document once for the proposed business deal and again for the obligations you would accept by signing. An ABA discussion of preliminary agreements illustrates how binding provisions can exist within an otherwise nonbinding proposal. That article discusses particular cases; it does not determine the effect of your LOI under current applicable law. Ask your lawyer to identify the operative provisions and explain the consequence of each.
Scroll sideways to compare columns. You can also focus the table and use the arrow keys.
| Decision | Car wash detail to resolve | Useful evidence |
|---|---|---|
| What changes hands? | Wash equipment, POS rights, member agreements, signs and property may have different owners or transfer terms. | An included/excluded asset list matched to ownership records. |
| What cash arrives? | A seller note, earnout, escrow and debt payoff affect the closing amount differently. | A price-to-cash calculation with deferred amounts shown separately. |
| What can delay closing? | Landlord consent, discharge authorization, site findings and lender conditions need identifiable owners. | A diligence list with dependencies and completion evidence. |
| What restrictions start now? | Exclusivity, access, confidentiality and expense terms need their own review. | Counsel's explanation of duration, termination and continuing obligations. |
Use the table as a discussion sheet, not wording to paste into an agreement. An unresolved item should have a named reviewer and a next step. If the buyer and seller mean different things by a term, preserve that difference in the issues list until it is actually resolved.
Reference for this section: ABA Business Law Today: Avoiding Benefit of the Bargain Damages in Letters of Intent (October 2010, PDF pages 8–9)
Show the price as a calculation
Separate cash, seller financing, earnout and rollover components. Identify adjustments and whether the stated amount assumes a defined earnings level. If future performance determines part of the price, address the measurement framework early.
Include a sample bridge from headline price to estimated closing cash. Even if figures are preliminary, the exercise exposes misunderstandings about payoffs, escrows and included assets.
Work through the amount available at closing
Illustrative example: an LOI describes a $2 million total price, consisting of $1.6 million payable at closing, a $300,000 seller note and an earnout capped at $100,000. If $50,000 of the closing portion is placed in escrow and $400,000 goes to debt payoffs, the amount released to the seller is $1.15 million before fees, taxes and other adjustments. The note remains exposed to repayment risk, the earnout could pay zero, and release of the escrow depends on its terms.
Ask whether the stated price includes the land, assumes a working-capital target or includes a deposit already paid. Show a deposit as a credit against the agreed payment when the documents provide for that treatment; do not count it twice. List property and business payoffs separately when different entities own those assets.
Now compare that calculation with the owner's required closing cash and desired level of continuing involvement. A larger headline price may leave less immediate cash or require years of exposure to a business the seller no longer controls. The LOI discussion should surface that tradeoff before the seller spends substantial time on a structure that cannot meet the objective.
Set a workable diligence scope
Describe the main financial, operating, legal, property and environmental reviews. Identify needed third-party access and required consents. Set a process for additional requests without granting unrestricted contact with staff or counterparties.
Define milestones and who is responsible for each step. A deadline that ignores lender, landlord or environmental work may create pressure without increasing the likelihood of closing.
Evaluate exclusivity carefully
Exclusivity limits the seller’s ability to pursue alternatives for an agreed period. Ask when it begins, when it ends, what progress is expected and whether extensions require agreement. Understand the consequence of a buyer missing milestones.
Counsel should assess the exact language, including termination, expense reimbursement and any continuing restrictions. Do not rely on a label or a verbal assurance about which provisions matter.
Reference for this section: ABA Business Law Today: Avoiding Benefit of the Bargain Damages in Letters of Intent (October 2010, PDF pages 8–9)
Evaluate an extension using completed work
Illustrative situation: halfway through an agreed exclusivity period, the buyer requests more time. Its accountant has completed the revenue reconciliation, but the proposed lender still needs the equipment schedule and the landlord has not received the buyer's information package. An extension discussion should identify those separate dependencies and who is responsible for each.
Ask the buyer for a current request list and a funding update. Confirm which missing items are within the seller's control. Then have counsel explain the available choices under the signed documents, including any notice requirements. A missed milestone does not automatically end an obligation unless the applicable terms and law produce that result.
- If the economics change, update the price calculation as well as the schedule.
- If a new purchasing entity appears, recheck its authority, funding and contract obligations.
- If additional site access is requested, agree on attendees, scope and contact rules.
- If the process ends, have counsel confirm restrictions that continue and the handling of confidential material.
Describe the transition and retained risk
Address expected seller involvement, property leases, noncompetition concepts, employee treatment and material liability allocation at an appropriate level. These terms will need more detail in definitive agreements, but major expectations should not first appear at the end of diligence.
If a seller note or retained equity is central to the price, request the proposed framework for security, priority, governance and exit. A headline percentage does not describe the rights attached to the investment.
Move from LOI to definitive documents
An LOI is part of a process, not a substitute for a purchase agreement. Keep a list of unresolved items and make sure revisions are reflected consistently in later documents. The definitive agreement will address representations, conditions, remedies, closing mechanics and post-closing responsibilities in more detail.
Before signing, be able to explain the economics, the path to closing, the limits on your alternatives and the obligations you are accepting. If a material question is unanswered, resolve it with your advisers before treating the process as settled.
Sources and scope
These references support the specific topics described below. Recorded source-check dates are shown where available. Our checklists and examples are educational analysis, not transaction or professional opinions.
- ABA Business Law Today: Avoiding Benefit of the Bargain Damages in Letters of Intent (October 2010, PDF pages 8–9)
Historical legal analysis illustrating binding provisions in preliminary agreements. It is not a current jurisdiction-by-jurisdiction statement or a ruling on your LOI.
Source checked
This guide provides general education. Your documents, jurisdiction and circumstances determine the advice you need. Figures labelled illustrative are examples, not reported transactions or market benchmarks.