Why Your Attorney Needs to Be Involved from the Letter of Intent Phase

Buying or selling a business is a significant milestone, whether you’re an entrepreneur exiting your company or an investor looking for your next opportunity. One of the first steps in this process is the Letter of Intent (LOI) – a document that outlines the key terms of the deal before the parties proceed to a binding purchase agreement.

While an LOI is often considered a “non-binding” document, it carries serious legal and strategic implications. Many business owners make the mistake of signing an LOI without consulting an attorney, only to find themselves locked into unfavorable terms or losing leverage in negotiations.

Here’s why your attorney should be involved before you sign an LOI and how their guidance can help protect your interests.

What Is a Letter of Intent (LOI)?

A Letter of Intent (LOI) is a preliminary document that outlines the basic terms and conditions of a proposed business transaction. It serves as a roadmap for the negotiation process and sets expectations for both parties before drafting a formal Purchase Agreement. An LOI typically includes:

• The purchase price and payment terms

• The structure of the deal (asset sale vs. stock sale)

• Key conditions for closing (such as financing, due diligence, or regulatory approvals)

• Confidentiality and exclusivity clauses

• A timeline for the transaction

• Whether the LOI is binding or non-binding

While the primary goal of an LOI is to set the stage for final negotiations, it can also create legal obligations that impact the buyer and seller’s leverage moving forward.

Why Your Attorney Needs to Be Involved in the LOI Phase

1. An LOI Can Contain Binding Provisions

Many business owners assume that because an LOI is labeled “non-binding,” it carries no legal weight. However, certain provisions—such as confidentiality, exclusivity, break-up fees, and governing law clauses – can be legally enforceable. If these terms are not carefully negotiated, one party may find themselves bound by obligations that they didn’t intend to agree to, such as:

• Exclusivity Clauses: A seller may unknowingly agree not to negotiate with other buyers for a set period, potentially reducing competitive offers.

• Confidentiality Requirements: Buyers and sellers must ensure that sensitive business information is adequately protected during negotiations.

• Good Faith Obligations: Some jurisdictions require parties to negotiate in good faith once an LOI is signed, which can complicate later negotiations.

Your attorney will ensure that binding provisions are clearly identified, reasonable, and protect your interests.

2. Negotiating Key Deal Terms Upfront Prevents Surprises Later

Once an LOI is signed, the negotiation dynamics change. A well-drafted LOI sets the foundation for the purchase agreement, but a vague or one-sided LOI can lead to disputes, delays, and even deal failure. Key terms that should be addressed before signing an LOI include:

• Deal Structure: Will the transaction be an asset sale (where the buyer purchases specific business assets) or a stock sale (where the buyer takes over the entire entity, including its liabilities)? This choice has significant tax and liability implications.

• Price Adjustments & Earnouts: Will there be adjustments to the purchase price based on financial performance? If so, how will they be calculated?

• Non-Compete Agreements: If a seller is exiting, will they be restricted from starting a competing business for a period of time?

• Financing Contingencies: If the buyer needs financing, does the LOI allow the seller to back out if funding isn’t secured within a certain timeframe?

By bringing in an attorney at the LOI stage, both parties can avoid misunderstandings and last-minute conflicts that could derail the deal. It also means your attorney will be familiar with the deal terms when they begin drafting the purchase agreement, and will not be in the dark regarding the historical negotiations of the deal.

3. Protecting Your Leverage in Negotiations

The LOI is often the most critical point in negotiations because it sets the tone and expectations for the deal. If a buyer or seller agrees to unfavorable terms in the LOI, it becomes much harder to renegotiate those terms later. For example:

• Sellers who accept a low offer in the LOI may struggle to justify a higher price later.

• Buyers who fail to include due diligence contingencies could be forced to close without fully vetting the business.

An attorney will help you strategically frame the LOI so that it provides flexibility while still locking in favorable terms.

4. Avoiding Hidden Liabilities & Legal Risks

Every business sale comes with potential risks, including undisclosed liabilities, tax complications, intellectual property issues, and employment law concerns. If these risks are not addressed in the LOI, they can cause serious problems down the line. An attorney can help by:

• Identifying potential liabilities before the deal progresses too far

• Ensuring that due diligence rights are clearly stated

• Clarifying how business debts, contracts, and employee obligations will be handled post-sale

5. Drafting a Clear & Effective Roadmap for Closing

A well-drafted LOI should include a timeline and roadmap for completing the transaction. Without this, deals can drag on indefinitely or fall apart due to uncertainty. Your attorney will help ensure that the LOI includes:

• Milestones for due diligence

• Deadlines for signing a final Purchase Agreement

• Contingencies that must be met before closing

By clarifying these expectations upfront, both parties can move forward with confidence and efficiency.

The LOI Is More Than Just a Formality

A Letter of Intent is not just a preliminary document—it is a critical negotiation tool that sets the stage for the entire business sale or purchase. Without proper legal guidance, business owners risk signing an LOI that weakens their position, locks them into unfavorable terms, or exposes them to unnecessary legal risk.

At Auxo Law, we specialize in guiding business owners through the complexities of buying and selling businesses. Our expertise ensures that your LOI is strategically structured, legally sound, and aligned with your best interests.

If you're planning to buy or sell a business, don’t wait until the final contract stage—contact us today to ensure your LOI protects your rights from the very beginning.