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Financing & Exit

Letter of Intent (LOI)

Quick Definition

A short document in which a buyer sets out the price and main terms on which it proposes to acquire a business, signed before full diligence.

What is a Letter of Intent?

A letter of intent (LOI) is a short document in which a buyer sets out the price and main terms on which it proposes to acquire a business. It comes after early conversations and before full diligence, and it is the point at which a sale process narrows from several interested buyers to one.

For a brand's owners it is the first time an offer is written down in a form that can be compared with another: the headline number, how much of it is paid in cash at closing, how much is paid later, and on what conditions.

What a Letter of Intent Covers for an Ecommerce Brand

A typical LOI for a brand sets out:

  • Price and form of payment: cash at closing, any seller note paid over time, any earn-out, and any part of the price held in escrow against claims after the sale.
  • Structure: whether the buyer is acquiring the company's shares or only its assets, such as inventory, trademarks, listings and supplier contracts.
  • Working capital: the target level of inventory, receivables and payables the brand must deliver at closing, and how it will be measured. Smaller brand deals often price inventory on top, at cost, instead of setting a peg.
  • Process: the diligence the buyer plans, the expected closing date, whether the owner stays on and for how long, and the exclusivity period.

What a Buyer and a Seller Look At

The buyer uses the LOI to secure exclusivity before spending on a quality of earnings review and legal diligence. The seller reads it for how much of the headline price is certain. Two offers with the same number can differ widely once seller notes, earn-outs, escrow and the working capital target are counted. Most of an LOI does not bind, which is why sellers often try to settle the terms that matter most to them in it, before exclusivity shifts leverage to the buyer. Counsel drafts and reviews the letter for a real deal.

Further Reading

How to Prepare and Sell Your Ecommerce Business

Example

An LOI for an owner-run brand with $2M of seller's discretionary earnings offers $8M, four times SDE, structured as:

  • Cash at closing: $6M
  • Seller note: $1M, paid over three years
  • Earn-out: up to $1M, tied to next year's gross profit
  • Escrow: 10% of the cash at closing, $600,000, held for 12 months

Cash the seller can count on at closing is $6M − $600,000 = $5.4M, before repaying any debt, paying deal costs and taxes, and any working capital adjustment. The remaining $2.6M depends on the seller note being paid, the earn-out being earned and no claims being made against the escrow.

General education only, not legal, tax or investment advice; how a term applies to your brand depends on your own documents and advisers.

Frequently Asked Questions

A letter of intent for the sale of a brand is usually non-binding on price and deal terms, so either side can generally walk away or renegotiate after diligence. A few clauses usually bind once signed, most often exclusivity, confidentiality and sometimes expenses or a duty to negotiate in good faith. The letter itself says which parts bind, and counsel reads that section before it is signed.

Exclusivity in a letter of intent means the seller agrees to stop talking to other buyers for a set period, often 60 to 90 days, while the chosen buyer completes diligence. It gives the buyer confidence to spend on accountants and lawyers. For the seller it removes competing offers, which is why price and structure need to be settled before the period starts.

The price in a letter of intent can change before closing through diligence findings and the adjustments the letter already allows. A quality of earnings review that lowers EBITDA can lower the price at the same multiple, a working capital shortfall at closing reduces it dollar for dollar, and an earn-out or escrow moves part of it later or puts it at risk.

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