Understanding buyer offers, LOIs, and financing options

When a buyer completes high-level due diligence and is ready to move forward, they can submit either an Informal Offer or a Formal Offer, known as a Letter of Intent (LOI).

An IOI is a preliminary proposal that shows the buyer’s interest and outlines key terms like the purchase price. However, it does not include detailed legal or payment terms. It's intended to open discussions and assess whether both parties are aligned on basic deal terms.

After receiving an IOI, your M&A Advisor will review the offer with you and discuss potential next steps. You can decide whether to accept, counter, or continue evaluating other buyers.

Example IOI:
"I’d like to purchase your business for $1,000,000 with $750,000 upfront and $250,000 in seller financing over 5 years at 6.5% interest."

An LOI is a more formal, non-binding agreement that lays out the buyer’s proposed price and terms for the transaction. While the terms may still evolve during due diligence, the LOI serves as the starting point for detailed negotiations. It typically covers price, payment structure, contingencies, and other key conditions.

LOIs are generally 3 to 5 pages in length and provide clarity around each party's roles and responsibilities. Once you receive an LOI, you’ll usually have about 1 week to review and sign it, though this can be extended if needed. During this time, your M&A Advisor will contact any other interested buyers to notify them that an LOI is on the table. If those buyers wish to compete, they must submit their own LOI by a set deadline.

Signing an LOI often initiates an exclusivity period, a set timeframe during which your business is temporarily taken off the market. During this period, you won’t be able to entertain offers or negotiate with other buyers. Exclusivity typically lasts 30 to 90 days, though the length and terms can be negotiated depending on your situation and buyer preferences. This period gives the buyer time to conduct detailed due diligence and secure financing without competing offers.

Buyers generally use a combination of equity, loans, and seller financing to fund an acquisition. Understanding these methods can help you assess buyer credibility and the likelihood of completing the deal.

1. Equity (The buyer pays)

Buyers may use personal savings or raise funds from private investors to provide the equity portion of the purchase. This upfront investment reduces the amount of financing needed and demonstrates the buyer’s financial commitment to the transaction.

2. Traditional Loan (The bank lends)

Many buyers secure loans through traditional lenders or Small Business Administration (SBA) financing. SBA loans are attractive because they offer competitive interest rates and extended repayment terms. However, the loan approval process involves a thorough review of both the buyer’s personal finances and the business’s performance.

When a buyer submits an LOI, they often include an Interest Letter from a lender, which indicates preliminary loan approval based on the information provided. Once full underwriting is complete, the buyer will obtain a Commitment Letter, confirming the final loan terms and conditions.

3. Seller Financing (The seller lends)

Buyers may also request seller financing, where you agree to finance part of the purchase price. The buyer makes regular payments to you over a set period, usually with interest, similar to a traditional loan. Offering seller financing can help close the deal faster by making your business more accessible to buyers who may not have all the cash upfront. It can also allow you to negotiate a higher sale price, although you’ll need to assess the risk of relying on future payments from the buyer.