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Letter of Intent Terms to Settle Before You Sign

A letter of intent sets the shape of the deal before the lawyers write a contract, and Stockton Business Brokers Prime sees sellers regret the loose ones.

Settle these points first.

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The short version

  1. Lock price, payment terms and closing date in writing before the full contract.
  2. Settle how the price is split across assets before you sign.
  3. Do not grant exclusivity to an unsolicited buyer until you have tested the market.
  4. Ask for proof of funds, not a promise.

More Than a Price

Besides the number, a letter should cover when and how you are paid, cash versus equity, what the buyer will inspect, financing contingencies and the closing date.

Every point left open becomes a negotiation later, when you have less negotiating room.

Asset Allocation

Most small deals are asset sales, and the price is split across equipment, inventory, goodwill and any noncompete. Different categories can be taxed differently, so ask your CPA to model it before you sign.

Both sides file the same allocation with the IRS, and the two filings must match. Settle it now, not later.

Exclusivity

Buyers often ask for exclusive time to do diligence. Be careful with an unsolicited buyer, who may be hoping for a cheap deal done fast. Get a valuation and test the market before you agree.

Do Not Treat It as a Formality

A letter feels friendly, but it frames every later fight. Terms left vague tend to be filled in against the seller. Have your attorney read it, even though it is short.

Proof the Buyer Can Pay

Ask for proof of funds or a lender commitment letter, not a verbal promise. Many buyers who say they have SBA financing have not started a loan.

Binding and Nonbinding Parts

Most letters are not binding on price, but parts such as confidentiality and exclusivity often are. Ask your attorney which sections bind you and for how long, and avoid long exclusive periods with a buyer you have not met.

Timeline Terms

Set a diligence period, usually a couple of weeks, and make the buyer's deposit refundable only until that period ends. After diligence the deposit should be at risk. Lock the closing date and what happens if it slips.

Next Steps

Read how buyers fund a purchase and what a lease assignment requires, then request a valuation call.

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