What Happens After You Sign a Letter of Intent to Buy a Business?
The letter of intent (LOI) gives the buyer and seller a common framework before substantial diligence and definitive drafting begin. However, an LOI should not automatically be treated as nonbinding simply because it is labeled a “letter of intent.” Under New York law, for example, courts may enforce certain preliminary agreements, including a commitment to negotiate open terms in good faith, when the parties intended to be bound. Once the LOI is signed, the buyer typically moves into due diligence, confirms financing, negotiates the definitive purchase agreement, obtains required consents and approvals, and prepares for closing.
DiFalco & Fernandez advises business owners, entrepreneurs, and investors on business transactions. Our lawyers in New York and Florida can help buyers understand which LOI provisions already create obligations, investigate the target company, protect the economics of the proposed deal, and turn preliminary terms into a closing structure that supports the buyer’s business goals.
What Is a Letter of Intent When Buying a Business?
A letter of intent (LOI) is a preliminary document that outlines the principal terms on which a buyer proposes to acquire a company or its assets. It commonly addresses the purchase price, transaction structure, payment terms, due diligence period, financing assumptions, exclusivity, anticipated closing date, and important conditions.
What happens after a buyer signs a letter of intent generally follows a series of connected steps.
Due Diligence Begins
After the LOI is signed, the seller commonly gives you, as the buyer, access to company records. The goal is to test the assumptions behind the offer and determine what you will actually acquire.
Legal due diligence may cover organizational and ownership records, material contracts, leases, intellectual property, licenses, litigation, employment matters, debt, liens, insurance, and regulatory compliance. Financial and tax advisors may review earnings, tax filings, working capital, customer concentration, expenses, inventory, and other financial information.
Diligence is not simply a search for reasons to terminate the deal. It helps you understand which obligations may transfer, what consents are needed, and whether the proposed price and structure still make sense.
Diligence Findings May Change the Deal
An LOI often reflects assumptions made before a full investigation. If those assumptions prove inaccurate, the parties may revisit the transaction.
As the buyer, you might discover unpaid obligations, threatened litigation, a major contract affected by a change of control, equipment subject to liens, or intellectual property that was never properly assigned. Those findings may affect valuation, closing timing, liability allocation, escrow terms, indemnification rights, or whether the acquisition proceeds at all.
Not every problem requires a price reduction. The seller may instead cure the issue before closing, obtain a necessary consent, repay debt, place funds in escrow, provide a specific indemnity, or retain an unwanted liability.
Financing Is Finalized
If the purchase depends on a bank loan, investor capital, seller financing, rollover equity, or another funding source, financing work usually moves forward alongside diligence.
As the buyer, you may need to complete underwriting, negotiate loan documents, satisfy collateral requirements, or confirm your cash contribution. Financing terms must also align with the purchase agreement, including any seller note or other deferred payment arrangement.
You should also budget for transaction expenses, taxes, insurance, working capital, and integration costs rather than focusing only on the headline purchase price.
The Definitive Purchase Agreement Is Negotiated
The LOI provides the framework, but the definitive purchase agreement creates the detailed contractual rights and obligations that govern the acquisition.
Depending on the structure, the main agreement may be an asset purchase agreement, stock purchase agreement, membership interest purchase agreement, or merger agreement. It generally identifies what is being purchased, how consideration is paid, which liabilities transfer, what representations and warranties apply, which conditions must be satisfied before closing, and what remedies exist if contractual promises prove inaccurate.
This is also where diligence findings are turned into contractual protections. A particular risk may be addressed through a targeted representation, closing condition, escrow, holdback, covenant, or indemnity.
Consents, Approvals, and Closing Conditions Are Addressed
A signed LOI does not guarantee that the deal can close. Contracts, leases, loan documents, licenses, permits, or corporate governance documents may require consent or approval before the acquisition is completed.
Depending on the transaction, the parties may need landlord approval, customer or vendor consent, lender approval, lien releases, board or shareholder approval, or regulatory clearance. Larger acquisitions may also trigger federal premerger notification requirements under the Hart-Scott-Rodino Act concerning antitrust rules.
You and the seller then work through a closing checklist. Conditions may include completing financing, delivering disclosure schedules, obtaining third-party consents, paying specified debt, releasing liens, confirming that representations remain accurate, and delivering required corporate approvals.
Closing documents may include bills of sale, assignment agreements, intellectual property transfers, escrow documents, certificates, and funds-flow instructions.
Can You Walk Away After Signing an LOI?
Possibly. If the transaction terms are expressly nonbinding, you may be able to stop negotiations before signing a definitive purchase agreement. However, binding LOI provisions may continue to apply even if the acquisition does not close.
The answer depends on the signed language and applicable law. As the buyer, you should review confidentiality, exclusivity, expense allocation, deposit provisions, termination procedures, and governing-law terms before assuming the LOI creates no legal exposure.
The same caution applies when due diligence uncovers information that changes your view of the transaction. Before withdrawing, requesting a price adjustment, or proposing different terms, you should determine what the LOI and any other signed documents require.
Seek Legal Counsel When Buying a Business
Buyers preparing to acquire a company or business assets can seek legal guidance before preliminary terms become the foundation for the rest of the transaction. DiFalco & Fernandez advises buyers from the LOI stage through diligence, transaction documents, approvals, closing, and post-closing matters. Our corporate lawyers in New York and Florida can help evaluate the proposed structure, identify legal concerns, coordinate deal requirements, and document the acquisition around the buyer’s commercial objectives.
This article is provided for general informational purposes only and is not legal advice. Reading it does not create an attorney-client relationship. DiFalco & Fernandez attorneys are admitted to practice in New York, Florida, and/or Connecticut.
