Bridging the Way BayState Business Brokers blog

Want to buy a business? Don’t use a non-binding letter of intent.

by | Oct 12, 2010

A letter of intent is an offer to buy a business.  It will typically have the basic outline of the deal: price, terms, important other provisions and contingencies upon which the sale depends. Typically, these contingencies would be due diligence, financing, obtaining a lease on the premises, obtaining any necessary licenses, and a mutually agreeable purchase and sale agreement.  What makes a letter of intent non-binding is that it includes language that clearly states that it is not a binding offer.  It is not unusual to see an exclusivity clause in the non-binding letter of intent.  Since it is not binding, the buyer wants to have time to evaluate the business without the risk that another buyer will buy the business.  But, because it is a non-binding offer, sellers generally won’t agree to this exclusivity.  If the buyer needs time to think about whether they want to buy the business, they should do it before they make the offer.

Non-binding letter of intentThe non-binding letter of intent is a problem for the buyer and seller.

When a seller is serious about wanting to sell their business, they want to deal with qualified and serious buyers. Accepting a non-binding letter of intent does not create a binding deal to sell the business, and accepting it may also prevent accepting a binding offer from another buyer. The detriment to a serious buyer who makes a non-binding offer is that the seller will not consider the non-binding offer seriously, and may, as a result, may also not consider the buyer as serious.

It is common in small business sales to use a purchase offer to make an offer.  The offer contains the same contingencies as listed above.  Normally, this offer is accompanied by a deposit – which is returned if the contingencies are not met.  Most business owners regard this offer much more favorably.  It is a binding offer and there is money on the table – even if it will be returned if the contingencies are not met.

The purchase offer is better for buyers because it is a binding deal.  If the contingencies are met, you have a deal to buy the business.  If the buyer makes a binding purchase offer, they don’t need the exclusivity.  They have a binding deal subject to the contingencies in the offer.

When presenting an offer to buy a business, the terms of the offer and how it is presented are both important.   BayState Business Brokers helps buyers and sellers in the process.  Although we represent the seller, we can help you, the buyer, create an offer and we can refer you to attorneys who can help you.



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