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A Letter of Intent (LOI) to buy a business or its assets may or may not include an expiration date and time.
When the Letter of Intent expiration date and time is defined, the buyer is putting the seller on notice that he or she must either agree to the terms defined in the letter or lose the opportunity to sell the business to the buyer authoring the LOI.
It’s important for the entrepreneur selling his business to understand that the terms defined in the Letter of Intent are negotiable and should be considered carefully and explored with his or her Merger & Acquisition Attorney and CPA. While a Letter of Intent is generally not binding on either party, it defines various deal points important to both the seller and buyer.
Why Include an Expiration in an LOI?
Business buyers may choose to include the expiration date and time in the Letter of Intent because they are actively pursuing the acquisition of several businesses at the same time. If such a buyer did not include an expiration date in the letter, then the deal terms defined may be considered inappropriately by the seller as an ‘offer on the table’ indefinitely.
Buyers who are actively seeking targeted businesses for sale will include the expiration date and time so they may move on to other prospects in a timely manner if the deal terms are not acceptable to the seller.
Typically, a buyer would state its Letter of Intent is open for acceptance for 72 to 96 hours, or in some cases a one-to-two weeks.
if a letter of intent expires before a subsequent contract is executed, are the parties bound by the date of letter of intent or the contract?
Hi Zena,
First, it’s important to understand LOIs are non-binding, with a few exceptions. For example, one of those exceptions may include a confidentiality clause after the LOI is signed by both parties.
As for the LOI expiration, buyers use them to push the seller to come to a decision regarding their offer. Their use creates a sense of urgency.
Once the LOI has been signed by both the buyer and the seller, there may be date defined in the LOI for the deal to close. That expiration date is often extended by mutual agreement. Otherwise, when it expires, the deal is dead.
If letter of intent has no closing date, can a seller walk out of the deal or renegotiate the sale price?
The appraisal came after the LOI was completed and it has been 8 weeks that I have been talking to my buyer.
Ghulam:
An LOI is an unenforceable document that simply indicates the buyer and seller’s intent. Either party can walk away or change the terms.
I have a LOI to buy my business that expired months ago after a 7 day period. A down-payment was made to me and the buyer was supposed to make monthly payments for the rest of the purchase amount. After 5 months of him running my business and no payments being made, he is saying the LOI is void, he is keeping the business and paying me no additional money. What are my options?
L Slay,
I am a business broker advisor with Exit Promise and am very familiar with LOIs. I’ve never heard of a LOI serving as a definitive binding business sale contract. Is this a contract where the buyer made a down payment and you agreed to seller finance the balance of the sale price? If the buyer is defaulting on the payments, you should have a contract that would protect you in this situation. Sounds like you should consult with an attorney with business sales expertise.
Greg Younts
L: While I am no attorney, reading your message indicates that there may have been some super-critical things missing. You “sold” a business based on a “letter of intent” to purchase. I didn’t read anything about you CLOSING on a sale with a Letter of Sale or invoice or anything. I didn’t see anything about a financing NOTE that says he owes you and what happens if he defaults.
You may have been so excited to sell the business that you turned over the keys before transferring ownership. If this is the case, you need to get your keys back and kick out the clown falsely claiming ownership.
I would recommend that you contact an attorney — like yesterday!
What makes an LOI a binding agreement? If no term limits are specified in the LOI is there a “reasonable” period of time that can be implemented? I have an LOI without term limits that specifies purchase price only and additional terms have been verbally expressed by buyer making the deal unacceptable and now 43 days into the originally accepted LOI.
Hello J Esparza,
I am a Business Broker Adviser with EXIT Promise with many years of experience in negotiating LOIs. For the most part, an LOI is a non-binding agreement. However, it needs to address much more than a sale price. Typically, a solid LOI should address sale price and what the sale price includes such as Earnest Money to be applied to the sale price, cash due at closing, seller financing amount, third party financing amount and any other items that would be included. At a minimum, it should also include a reasonable time period to complete due diligence, a target closing date, non-compete terms, training/transition period, target date for the buyer to get third party financing approval, and a target date for the buyer and seller to execute a definitive purchase agreement.
Typically, what should be binding is that the buyer and seller will agree to keep all communications confidential, and during the time period needed to complete the definitive purchase agreement, the seller will not accept an offer from another buyer. Typically on behalf of the seller, I have been able to gain agreement from the buyer to continue to market the business, but any offers from other buyers are back-up offers that are not presented to the seller unless the LOI terminates.
The termination date of the LOI is often tied to the date agreed upon to execute the definitive purchase agreement. If the purchase agreement is not completed by the agreed upon date, the LOI terminates, or buyer and seller agree to extend the date if there is a good reason why the purchase agreement is not done. Depending on the size and complexity of a transaction, I have seen the time period to complete the purchase agreement range from 15 to 60 days. In rare cases, it goes beyond 60 days if there are issues to be resolved and buyer and seller are both making every effort to expedite the process.
Finally, you should use the services of a business broker and/or attorney to complete the LOI. A comprehensive LOI that addresses the major issues helps to eliminate possible misunderstandings or disputes as you go forward to complete the sale.
I hope this helps.
Greg Younts
did you say it takes 15 to 60 days to write up a purchase agreement or 15 to 60 days to complete and finalize the purchase
I have a LOI to sell an Industrial Lot, it’s expiration date has come and gone and my emails to the buyer have gone unanswered. There was a non refundable deposit no contingencies, sent directly to me (seller) no realtors involved. Can I move on and find another buyer and keep the deposit without further notice?
Hi Robert,
The Letter of Intent to acquire your property should spell out the non-refundable deposit terms.
I’d look at that language in your LOI to gain a better understanding regarding the circumstances in which you’d be required to return the deposit to the buyer.
And if the exclusivity clause in the LOI expired already, you should feel comfortable to put the property back on the market.
All the best…
I have an L.O.I. regarding a wetland delineation. It has a date of May 6, 2010 I am being told I need it updated, or done again. How can I find out what the “expiration date is for my L.O.I.?
Hi Steve,
I believe the letter you have received is a Letter of Interpretation with regard to a wetland delineation.
This post is addressing a Letter of Intent to buy a business.
I am sorry Steve. I do not have any experience working in wetlands. Maybe the Department of Environmental Protection agency in your state could help you with this matter.
All the best to you…
Please treat this as a letter of Intent (‘LOI”) valid for a period of 15 days from the date of issue of the letter upon expiry of which the letter of intent will expire without any further conditions or liabilities on your or our side unless an offer letter dually executed by the company is issued to you before the expiry of the aforesaid day period.what it really means?
Saradha, it’s as John says. In addition, if they make you an offer before the 15 days is up then that offer will override anything that’s in this LoI.
Simple enough if it wasn’t for the legalese, Saradha. In 15 days the offer will cease to exist and it will be like it never happened. No harm, no foul. It is intended to get you to reply quickly.
I have made an offer for a business. I didn’t put a expire date. It has been two weeks now. I called last week to make sure that they received the letter, which they did. How long should I wait? or is there any tips on speeding up the process?
Good morning Sarah,
If your offer did not have an expiration date, the recipient has little-to-no incentive to address the matter in a timely fashion. In fact, this can be a risky situation for you as they could hold onto the offer and keep you in limbo.
This keeps you from being able to actively pursue other acquisition opportunities.
You may want to consider rescinding the offer in writing. You could always resubmit the offer with a definitive deadline for acceptance.
Keep us posted!
All the best Sarah…
If a binding LOI has a 45 day expiration date but both parties agree to extend as long as both parties are negotiating in good faith, how would one party exit per the fact after the 45 days, the one party has an offer 2.5 times more then what is being offered from the buyers?
Hi Bruce,
I an not quite sure about what you are asking.
Generally speaking a Letter of Intent is not a binding contract. The underlying principle is that the two parties agree to negotiate in good faith according to the terms defined in the LOI.
If the 45 days have passed and the agreement specifies the LOI can be extended, the parties should execute an extension if both want to continue the process.
It sounds to me that you may want to let the LOI expire due to the fact that you have a better offer from another buyer. If that’s the case and the LOI has expired, then the seller should be able to consider an offer from another buyer.
However, I caution you because typically a buyer would include a ‘no shop provision’ during the term of the Letter of Intent which would prohibit the seller from seeking other offers until the LOI expired.
I hope this helps Bruce!
All the best…