Letter of Intent (LOI) to Buy a Business in New York: Buyer Guide
You found a New York business you want to buy. You have talked with the owner, reviewed the asking price and decided you are interested in moving forward. Now the seller has sent you a letter of intent, or LOI, and wants you to sign it before the deal proceeds.
What should you do?
For many buyers, the instinct is to sign quickly. After all, you do not want the seller to find another buyer while you are still negotiating. But an LOI is more than a simple expression of interest. The terms you agree to at this stage can shape the rest of the acquisition and affect your negotiating position once due diligence and purchase agreement negotiations begin.
That does not mean your LOI needs to be a lengthy legal document. It does mean you should understand what you are agreeing to before you sign it.
If you are buying a business in New York, here are the issues I recommend considering before signing a business purchase letter of intent.
What Is a Letter of Intent When Buying a Business?
A letter of intent is a preliminary document that summarizes the principal terms of a proposed business acquisition. It is generally negotiated after the buyer and seller have reached enough common ground to seriously explore a transaction but before the parties finalize the purchase agreement.
You may also hear an LOI referred to as a term sheet or deal memo.
The purpose is to get the major business points on paper before everyone spends significant time and money negotiating the definitive documents. A typical LOI may address the proposed purchase price, transaction structure, financing, due diligence, exclusivity, closing conditions and other major terms.
The LOI or deal memo is a document that can establish the proposed purchase price, purchase terms, key business points and conditions for the sale before the purchase agreement is prepared.
The LOI therefore serves an important practical purpose. It gives the buyer and seller an opportunity to find out whether they actually agree on the fundamental deal before spending substantial resources on the rest of the transaction.
Is a Letter of Intent Legally Binding in New York?
This is one of the most important questions to answer before signing an LOI.
Often, the parties intend the primary business terms to be nonbinding. In other words, signing the LOI does not necessarily mean that the buyer is legally obligated to purchase the business or that the seller is legally obligated to sell it.
But that does not mean the entire document is automatically nonbinding.
An LOI can contain specific provisions that the parties intend to be enforceable. Confidentiality, exclusivity, access to information, expenses and governing law are examples of provisions that may be treated differently from the proposed purchase itself.
The language of the document matters.
A New York buyer should therefore look beyond the title of the document and determine exactly which provisions are intended to create obligations. Saying that an LOI is “nonbinding” does not eliminate the need to carefully review the provisions that the parties have agreed will be binding.
This is particularly important if you are about to spend substantial money on accountants, attorneys, financing professionals and other due diligence.
Before signing, you should know what happens if you decide not to proceed.
What Should Be Included in a New York Business Purchase LOI?
There is no universal LOI that works for every business acquisition. The appropriate terms depend on the size of the transaction, the type of business, the proposed deal structure and the risks involved.
A small New York professional services business may require a relatively straightforward LOI. An acquisition involving multiple locations, employees, inventory, commercial leases, intellectual property and significant financing will require considerably more attention to the details.
At a minimum, these are the major terms a buyer should understand.
Purchase Price
The purchase price is usually the first number buyers look at, but it is not necessarily the most important number in the transaction.
A seller may agree to a $1 million price, for example, but the buyer and seller still need to determine how that price will be paid and exactly what the buyer is receiving for it.
Is the entire amount being paid at closing? Is there seller financing? Is part of the price contingent on future performance? Is inventory included? Will there be a working capital adjustment?
Those questions can materially change the economics of the deal.
The LOI should establish the basic financial terms clearly enough that the buyer and seller are working from the same understanding before the purchase agreement is negotiated.
Asset Purchase or Stock and Membership Interest Purchase?
The structure of the acquisition is another major issue.
If you are buying the assets of a business, the purchase agreement will identify the assets being transferred and the liabilities the buyer is agreeing to assume. If you are purchasing the ownership interests in a corporation or LLC, you are acquiring the existing entity rather than simply selecting individual assets.
For a New York buyer, this distinction can affect contracts, licenses, liabilities, employees, taxes and other aspects of the transaction.
An LOI that simply says the buyer intends to “purchase the business” may leave too much unanswered.
The document should identify whether the parties are contemplating an asset purchase, stock purchase or membership interest purchase and establish the basic structure before everyone moves into detailed negotiations.
Seller Financing
Not every buyer will pay the entire purchase price with cash or acquisition financing.
Seller financing can allow the buyer to pay a portion of the purchase price over time, typically through a promissory note. If seller financing is part of the proposed transaction, the LOI should establish the major terms so there is no misunderstanding later.
Those terms may include the amount financed, interest rate, repayment period and general security arrangements.
The final promissory note and related documents can contain the detailed provisions. But there is little benefit in discovering during purchase agreement negotiations that the buyer and seller had completely different ideas about the seller financing arrangement.
Due Diligence
For a buyer, the due diligence period is where the proposed acquisition gets tested against reality.
The seller may have told you that the business is profitable, has loyal customers and has strong growth prospects. Due diligence is your opportunity to verify those claims and uncover issues that were not obvious during the initial negotiations.
Depending on the business, that may mean reviewing financial statements, tax returns, contracts, leases, customer information, employee matters, insurance, intellectual property, litigation, licenses and other records.
The LOI should give the buyer enough time and access to information to conduct a meaningful investigation.
It should also address what happens if the buyer is not satisfied with the results. If a major problem is discovered, can the buyer walk away? Can the purchase price be renegotiated? Is the transaction conditioned on obtaining financing or third party consents?
Those questions are worth answering before the buyer signs.
Exclusivity and No Shop Provisions
Imagine spending several weeks investigating a business, paying your accountant and lawyer, and applying for acquisition financing, only to learn that the seller has been negotiating with another buyer the entire time.
An exclusivity provision can help prevent that situation.
A no shop or exclusivity provision generally requires the seller to refrain from negotiating with competing buyers for an agreed period. This gives the buyer some protection while conducting due diligence and negotiating the definitive purchase agreement.
The duration matters. So does the scope of the restriction.
If the seller wants exclusivity from you, the buyer should understand exactly what they are receiving in exchange for committing resources to the transaction.
Confidentiality
A business acquisition can require the seller to disclose highly sensitive information.
You may receive financial records, customer information, pricing information, employee information, proprietary processes, contracts and other confidential materials that you would not otherwise have access to.
The LOI may contain confidentiality provisions or incorporate an existing nondisclosure agreement.
If a confidentiality agreement was signed earlier in the process, make sure the LOI does not conflict with it. You should also understand what happens to the information if the transaction does not close.
Seller Noncompete
A buyer may want the seller to agree to restrictions on competing with the business after closing.
This can be particularly important when the value of the company depends heavily on the seller’s relationships, reputation, customer base or industry knowledge.
The basic concept can be addressed in the LOI, while the detailed restrictive covenant is negotiated as part of the definitive transaction documents.
New York restrictive covenant law is an area where the details matter, and the enforceability of a particular restriction can depend on the language, circumstances and relationship involved. Recent New York cases continue to illustrate that overly broad restrictions can create enforceability problems.
A buyer should therefore avoid assuming that a generic noncompete copied from another transaction will automatically accomplish what the buyer wants.
Working Capital
Working capital is another issue that can be overlooked when buyers focus primarily on the purchase price.
Consider a business that is being sold for $750,000. If the seller removes cash and other operating assets before closing, the buyer may discover that the company needs a significant cash infusion immediately after taking ownership.
The parties should establish what financial condition the business is expected to have at closing.
Depending on the transaction, the LOI may address inventory, accounts receivable, cash and a target level of working capital. The purchase agreement can then establish the detailed calculation and adjustment process.
The important thing is to make sure the buyer and seller have the same expectations before the transaction gets too far along.
Assumed and Excluded Liabilities
One of the most important questions in any acquisition is what liabilities the buyer is taking on.
This is particularly important in an asset purchase, where the parties can negotiate which obligations are assumed by the buyer and which remain with the seller.
Potential issues can include accounts payable, customer deposits, employee obligations, taxes, loans, leases and litigation.
The purchase agreement will contain the detailed provisions, but the buyer should have a basic understanding of the proposed allocation before signing the LOI.
Do Not Sign a New York Business LOI Before Understanding These 7 Terms
Before signing, make sure you understand the purchase price and payment structure, transaction structure, due diligence period, exclusivity, assumed liabilities, working capital and which provisions are binding.
Those terms can have a significant impact on the risk and economics of the acquisition, even if the LOI itself is only a few pages long.
What Happens If Due Diligence Uncovers a Problem?
This is where a well structured acquisition process can protect the buyer.
Suppose you sign an LOI to purchase a New York business for $900,000. During due diligence, you discover that the company’s largest customer is planning to leave. Perhaps the financial records reveal expenses that were not previously disclosed. Maybe the commercial lease cannot be assigned on the terms you expected, or you discover pending litigation that changes your assessment of the business.
You do not necessarily have to abandon the transaction.
Depending on the circumstances, the buyer may be able to renegotiate the purchase price, restructure the deal, request additional protections or decide not to proceed.
For example, the parties might negotiate an escrow arrangement, additional representations and warranties, indemnification or a purchase price adjustment.
The key is discovering the problem before closing rather than after you have already paid the purchase price and taken ownership of the company.
That is why the due diligence provisions deserve serious attention before you sign the LOI.
Can You Change the Deal After Signing the LOI?
The definitive purchase agreement will contain many terms that are not addressed in detail in the LOI. The parties will negotiate representations and warranties, indemnification, closing conditions, tax provisions, restrictive covenants and other legal protections during that stage.
But buyers should not assume that the LOI can simply be ignored once the purchase agreement negotiations begin.
If you agree to a $1 million purchase price in the LOI, for example, the seller will generally expect that number to carry into the purchase agreement. If you agree that the buyer will assume a particular category of liabilities, changing that deal point later may be difficult.
This is why the LOI is an important negotiation document even when the proposed acquisition itself is nonbinding.
The goal is to establish the fundamental business terms while leaving room to address issues that emerge during due diligence and the negotiation of the definitive agreement.
5 Mistakes New York Buyers Make Before Signing an LOI
Looking Only at the Purchase Price
A business that appears inexpensive may not be a good deal if the buyer is assuming significant liabilities or needs to contribute substantial working capital after closing.
Assuming the LOI Is Completely Nonbinding
The purchase itself may be nonbinding while individual provisions create enforceable obligations. Buyers should understand the distinction before signing.
Waiting Until the Purchase Agreement to Hire a Lawyer
By the time the purchase agreement is being negotiated, the major economic terms may already be established. Having counsel review the LOI gives the buyer an opportunity to address important issues while there is still negotiating leverage.
Agreeing to a Short Due Diligence Period
A buyer cannot properly investigate a business without sufficient time and access to information. The appropriate period depends on the complexity of the acquisition.
Using “Buy the Business” Without Defining What That Means
An acquisition can involve assets, stock, membership interests, contracts, intellectual property, inventory, accounts receivable and liabilities. The LOI should make the intended structure clear.
Real Client Example: Why the LOI Matters
I recently worked with a buyer who was preparing to acquire an established business. The buyer and seller had already reached general agreement on the purchase price and were eager to get the transaction moving.
On the surface, it looked like a straightforward acquisition. But once we looked more closely at the proposed structure, there were questions about which assets would actually transfer, which liabilities would remain with the seller and what protections the buyer would have during the transition.
Rather than leaving those questions for the purchase agreement stage, we addressed the major issues while negotiating the LOI.
That gave the buyer a much clearer understanding of what they were agreeing to before spending additional money on due diligence and transaction documents.
This is one reason I encourage buyers to get legal advice before signing an LOI rather than waiting until the purchase agreement arrives.
When you have spent months looking for the right business, it is easy to become emotionally invested. You may be worried that asking too many questions or slowing down the process will cause the seller to choose another buyer.
But the LOI is exactly when you want to make sure the basic deal works.
Client details have been changed or generalized to protect confidentiality.
Should You Have a New York Business Lawyer Review Your LOI?
If you are buying a business in New York, having a business acquisition lawyer review the LOI before you sign it can help identify problems while there is still an opportunity to negotiate them.
An attorney can review the proposed transaction structure, evaluate the purchase price and payment terms, identify potentially binding provisions, examine the due diligence process and help determine whether the allocation of liabilities makes sense for the buyer.
There may also be issues that are not obvious from the headline purchase price. What happens to the seller’s accounts receivable? Are you taking over the existing lease? Is inventory included? Will the seller continue working in the business after closing? Is seller financing involved? What happens if a major customer leaves during due diligence?
Those questions are much easier to address before the LOI is signed than after both sides have spent weeks negotiating the purchase agreement.
Buying a Business in New York? Review the LOI Before You Sign
A letter of intent is often the point where a business acquisition stops being a preliminary conversation and starts becoming a real transaction.
It is not usually the final purchase agreement, but it can establish the basic economics and structure of the deal and create binding obligations regarding certain matters.
If you are buying a business in New York, make sure you understand what you are purchasing, what liabilities you may be assuming, how due diligence will work and which provisions of the LOI are binding.
Have an LOI in front of you? Do not sign it before you understand what you are agreeing to. I help buyers review and negotiate letters of intent for New York business acquisitions, including purchase price, transaction structure, due diligence, seller financing, exclusivity and liability issues.
Frequently Asked Questions About Letter of Intent for New York Business Buyer
Is a letter of intent to buy a business legally binding in New York?
An LOI can contain both binding and nonbinding provisions. The proposed purchase itself may be expressly nonbinding while provisions concerning confidentiality, exclusivity, expenses or other matters are intended to be enforceable. The language of the specific LOI matters, so buyers should review the document carefully before signing.
Should I have a New York business lawyer review an LOI?
Having an attorney review an LOI before signing can help a buyer identify important issues while there is still an opportunity to negotiate. The LOI may establish major economic and structural terms that influence the purchase agreement that follows.
What should a business purchase LOI include?
A business acquisition LOI commonly addresses the purchase price, payment terms, transaction structure, due diligence, financing, exclusivity, confidentiality, liabilities, working capital and anticipated closing conditions. The appropriate terms depend on the particular transaction.
Can I back out of buying a business after signing an LOI?
It depends on the language of the LOI and which provisions are binding. A buyer should understand the termination rights and obligations created by the document before signing rather than assuming that a nonbinding LOI means there are no legal consequences.
What is the difference between an LOI and a business purchase agreement?
The LOI generally establishes the major terms and framework of the proposed acquisition. The definitive purchase agreement contains the detailed legal terms governing the transaction, including representations and warranties, indemnification, closing conditions, liabilities and other protections.
An LOI can contain both binding and nonbinding provisions. The proposed purchase itself may be expressly nonbinding while provisions concerning confidentiality, exclusivity, expenses or other matters are intended to be enforceable. The language of the specific LOI matters, so buyers should review the document carefully before signing.
Having an attorney review an LOI before signing can help a buyer identify important issues while there is still an opportunity to negotiate. The LOI may establish major economic and structural terms that influence the purchase agreement that follows.
A business acquisition LOI commonly addresses the purchase price, payment terms, transaction structure, due diligence, financing, exclusivity, confidentiality, liabilities, working capital and anticipated closing conditions. The appropriate terms depend on the particular transaction.
It depends on the language of the LOI and which provisions are binding. A buyer should understand the termination rights and obligations created by the document before signing rather than assuming that a nonbinding LOI means there are no legal consequences.
The LOI generally establishes the major terms and framework of the proposed acquisition. The definitive purchase agreement contains the detailed legal terms governing the transaction, including representations and warranties, indemnification, closing conditions, liabilities and other protections.
