Offer to Purchase or Letter of Intent

Both terms are used to describe an offer made to purchase a business. An over-simplification of the definition of both documents is: An Offer to Purchase is usually written in contract form and defines the price, terms and conditions of the sale, and is usually accompanied by an earnest money deposit. A Letter of Intent (LOI) is usually written in letter form and also defines the price and the terms and conditions but usually doesn't call for an earnest money deposit.

Both agreements are legal and binding documents and are subject to clauses and conditions of the document, when signed by both the buyer and seller. An offer to purchase is more common in small transactions and the letter of intent is more common in large transactions.

Earnest money deposits are not legally essential to an offer to purchase, however, the buyer's earnest money deposit tends to dramatically increase the likelihood of closing. The seller is more receptive to the Offer to Purchase and the buyer is showing their commitment to the sale. Earnest money deposits of $5,000 to $10,000 on smaller transactions are typical. As a rule of thumb, the earnest money should be 10%-15% of the down payment.

When the buyer presents a Letter of Intent (LOI) instead of an Offer to Purchase, you do not have as strong of an offer and the percent of such offers that actually close will reduce. It is also difficult to get buyers to make an earnest money deposit on a Letter of Intent. The major problem is these agreements usually require that the seller cannot look at any other offers for a period of 30-45 days while the buyer is reviewing the records of the business. Many Letters of Intent will have a financing contingency. When the owner is offering substantial seller financing, there should be minimal contingencies for financing.

Beware of an individual or group of people who call themselves Investment Bankers or a Buying Group. When they cannot provide you with personal financial statements or a financial statement from their company, you have a very slim chance of ever closing the transaction. The seller should have a copy of the financial statement from the buyer attached to all offers.

Finally, there is no such thing as an oral offer! An oral offer is really just a test by the buyer to see what the seller will or will not accept. Make the buyer put the terms of the offer in writing as an intermediate step toward securing a legitimate offer.