Throughout the business acquisition process, there are many important documents needed from both the buyer and seller. Several key documents, which come at the beginning and end of the process, are imperative to the success of the deal — the Letter of Intent (LOI), the Offer to Purchase and the Purchase Agreement.
Letter of intent
What it is: A non-binding document that lays out contingencies and guidelines for a future agreement. This document is typically around 3-5 pages long and is presented at the beginning of an acquisition deal.
Why it’s important: The LOI contains four main elements — the price, the terms, due diligence and a closing date. It sets the stage for what is to come and provides the framework for the entire structure of the acquisition. Remember, it is non-binding, meaning certain details can change along the way. Note that the closing timeline outlined in the LOI begins when it is presented to the lender.
Who’s involved: If the buyer is working with a business broker, the broker will help facilitate the creation of the LOI. If the buyer is not working with a broker, your attorney can provide a basic LOI template.
Offer to purchase
What it is: Think of an Offer to Purchase as the middle-ground between an LOI and a Purchase Agreement. It establishes some connection between the buyer and seller and some elements are legally binding.
Why it’s important: This document is important to lay the foundation for a successful acquisition. To terminate an Offer to Purchase, you have to prove a viable reason. It is essentially a binding Letter of Intent.
Who’s involved: Offers to Purchase are used when brokers are involved, and like the LOI, the broker will assist in creating this document.
Purchase agreement
What it is: A legally binding document that offers the complete framework and intricacies of the business acquisition. This document averages around 200 pages and is much more comprehensive than the LOI or Offer to Purchase. It’s presented at the back end of the deal as the final binding agreement between the two parties.
Why it’s important: A Purchase Agreement is the last word in the deal. It covers all details of the acquisition including final terms of the deal, reps and warranties, covenants, contracts and employees, just to name a few.
Who’s involved: Because this is a complex, legally binding document, an attorney is a must. It’s not necessary to know all the ins and outs, but it’s wise to have a general understanding of the basic elements in a Purchase Agreement.
Business acquisitions can be complex, so leverage the knowledge and expertise of your Live Oak Bank loan team. Live Oak’s experts are well versed in best practices around Letters of Intent, Offers to Purchase and Purchase Agreements and will serve as your guide through the process.
