How to Proceed with an LOI

November 05, 2020

by a searcher from Columbia University - Columbia Business School in Princeton, NJ, USA

I have had 2 calls with the owner and reviewed the financials enough for me to move forward and proceed with a LOI. This business is generating ~$500K SDE and selling for 3X. I'm a self funded searcher and owner is flexible with upfront payment and seller note, but also looking into lending options or search investors.

1. What should go into an LOI and who can help draft?
2. How should I structure the deal given the current transaction?
3. What happens next after LOI is submitted?

Many thanks.

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Reply by an intermediary
from Arizona State University in Long Beach, CA, USA

Once the LOI is signed, you'll typically get a due diligence period (preferably exclusive) to complete your due diligence, work with a lender, begin lease discussions with landlord (if applicable), and start working on the Purchase Agreement towards the end of the timeline. If this is your first time, you should get a local intermediary or attorney to help you with the deal structuring and ensure adequate details are covered in the LOI to avoid misunderstandings that can lead to wasted time and frustration. There are a lot more details that one would need to consider than what you have shared here. Seller will want his attorney to draft the Seller Note, so you'll need your own legal counsel to review it. Sounds like you got a pretty flexible Seller, so that's a great start!

Reply by an intermediary
from Naval Postgraduate School in Bellevue, WA, USA

The LOI should be a roadmap to closing. Spend plenty of time on it and try to leave nothing for future negotiations. I believe that it is important for you to initially develop and negotiate the basic terms before you seek legal counsel (it has got to be yours). There are plenty of templates available on the internet. If you contact me by email, I can provide our nominal format as well as some pertinent guidance notes.

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