Letter of intent, or LOI, records proposed transaction terms and a framework for progressing toward a definitive practice-purchase agreement. Its actual language determines which provisions are intended to bind the parties and which remain conditional.
What should an LOI accomplish before detailed diligence?
It should expose material differences in the proposed bargain early enough to resolve them efficiently. A useful LOI defines the acquisition perimeter, payment structure, principal conditions, diligence process, and anticipated responsibilities.
The archived 2013 Journal of Accountancy succession-sale steps places transaction structure and detailed preparation within the sale process. Use that process reasoning without treating the article as current pricing evidence. The buyer and seller need enough specificity to know whether they are investing time in the same proposed transaction.
Begin with the valuation hub to connect the proposed price with cash flow and seller proceeds. An LOI quoting a price without explaining debt, receivables, working capital, contingent consideration, and continuing compensation can leave the economic bargain largely undefined. Avoid solving those disagreements only after the seller has paused other conversations.
Is every provision nonbinding until the purchase agreement?
Do not assume so. Counsel should review the entire document, identify intended legal effects, and make the binding or nonbinding treatment clear for each relevant provision.
Commercial proposals often remain subject to diligence, financing, approvals, and definitive documentation. Other clauses can address confidentiality, exclusivity, expenses, access, dispute terms, or termination. A heading alone does not answer how those provisions operate together. Review the governing language and applicable law rather than relying on a document’s nickname.
The seller should understand what changes immediately upon signing: information access, negotiation restrictions, expense commitments, and any duties to continue the process. The buyer should understand what remains uncertain. Ask counsel to resolve inconsistent language and undefined deadlines before the parties sign, while the document remains easy to revise.
Which economic terms should be written explicitly?
Write the consideration components and their dependencies separately. A headline amount can conceal substantially different combinations of immediate cash, fixed debt, conditional payments, equity, and post-closing work.
| Issue | Required commercial definition | Unresolved risk |
|---|---|---|
| Acquired perimeter | Assets, interests, client segments, and exclusions | Different interpretations of the purchased business |
| Closing payment | Amount, funding source, adjustments, and conditions | Insufficient available cash |
| Deferred price | Principal, timing, interest, and credit terms | Unclear or unsupported future payments |
| Conditional consideration | Measurement, control, reconciliation, and restrictions | Disagreement over entitlement |
| Working capital | Included balances and settlement mechanism | Double counting or operational cash gap |
| Seller services | Role, hours, term, compensation, and limits | Open-ended unpaid obligations |
Read seller financing before describing deferred consideration as equivalent to closing cash. The note’s credit risk, payment restrictions, and priority matter. Continuing wages or consulting fees compensate work and should be separated from the acquisition-price comparison.
How can a simple LOI example reveal ambiguity?
Reconcile every component to the headline amount and separately show service compensation. These numbers are hypothetical negotiating assumptions, not market pricing or an actual transaction.
Suppose a proposed $900,000 practice price consists of $630,000 closing cash, a $180,000 fixed seller note, and up to $90,000 conditional consideration. The maximum nominal price is $900,000, while fixed nominal consideration is $810,000. Neither figure establishes present value or guaranteed collection of the note.
If the seller also receives an assumed $30,000 for specified transition services, total possible cash receipts may reach $930,000 before interest and expenses. That does not make the practice price $930,000. The LOI should define the services and separately state their compensation so the owner does not mistake required labor for payment on sold assets.
How should diligence access be scoped?
Identify the information required, permitted access, protections, timing, and responsible reviewers. Confidentiality alone does not establish every legal basis for sharing tax-client information.
The archived 2014 Journal of Accountancy diligence discussion addresses disciplined diligence rather than casual inspection. Organize requests around specific underwriting and integration questions. Start with appropriately aggregated or de-identified information where feasible, then obtain the legal and professional review required for more sensitive access.
For the operating perimeter, use book of business to define the fee cohort and associated rights. Confirm how exclusions, existing disputes, client departures, and staff information will be handled. Maintain access records, limit unnecessary copies, and assign a process for returning or disposing of information if the transaction stops.
How should financing conditions be made credible?
Make the funding plan, milestones, and conditions specific enough to evaluate. A buyer’s statement that financing will be arranged is weaker than a documented path with identified requirements and deadlines.
Separate buyer equity, debt, seller financing, and any retained ownership. Confirm what evidence exists today and what still requires approval. The LOI should not imply that a lender has approved a structure when only a preliminary discussion occurred. Verify financing-program requirements before promising incompatible conditional payments or seller roles.
Discuss what happens if financing is delayed or denied. Align the diligence calendar with the lender’s information needs, regulatory reviews, and busy-season constraints. A seller can assess a conditional offer more fairly when the remaining dependencies and buyer responsibilities are visible rather than hidden behind an aggressive closing date.
How can exclusivity be connected to useful progress?
Define its scope, duration, milestones, and termination treatment with counsel. The business purpose is to allow focused diligence while avoiding an undefined period of inactivity.
The seller may pause other opportunities during the agreed period. The buyer may commit professional resources. Identify what each side must provide and when, so the calendar reflects a workable exchange. Avoid a timetable that expires before required data can lawfully be assembled or approved reviewers can examine it.
- Set a realistic initial information-delivery milestone.
- Identify buyer review, funding, and professional-approval dependencies.
- Schedule a written issue review before exclusivity expires.
- Specify how extension, termination, and information handling will be documented.
Missed milestones are information about the process, not proof of bad intent. Review the cause and decide whether a specific extension improves closing prospects. Keep revisions documented rather than letting an expired deadline become an informal indefinite obligation.
What happens when diligence changes the proposed price?
Reconcile the new evidence with the original assumptions and document the proposed change. A price revision should identify the issue, economic effect, and remaining uncertainty.
IBBA’s buyer and seller questions discusses acquisition evaluation and the role of transaction professionals. Use advisers to distinguish an unsupported negotiating demand from an issue that changes sustainable cash flow or transferred assets. A missing expense, departed client, or excluded receivable can have different consequences.
The quality of earnings analysis can help explain an earnings adjustment. It does not decide the price automatically. The parties can revise terms, resolve the underlying issue, or discontinue negotiations under the applicable documents. Clear assumptions make that conversation more specific and reduce the temptation to argue only about a quoted multiple.
What should be ready before the LOI advances to definitive documents?
Resolve major commercial issues or list them explicitly for the drafting team. The purchase agreement should implement an understood bargain rather than reveal a new one.
Provide the final perimeter, consideration schedule, financing plan, diligence findings, transition scope, required consents, and outstanding conditions. Assign an owner and deadline to every unresolved item. Verify that the proposed closing date allows authorization, data transfer, staffing, and professional obligations to be addressed.
The practical test is whether both parties can explain the transaction in the same terms. They should know what is being acquired, which dollars are fixed or conditional, what work remains, which clauses already bind them, and what must happen before closing becomes achievable.
A few common questions
What else should you know?
Is an LOI the same as a final purchase agreement?
No. It generally records proposed terms and a process toward definitive documentation, but its specific clauses can have legal effects. Counsel should identify intended binding provisions, conditions, and termination rights. Do not assume the title makes every clause nonbinding or that signing alone transfers the practice and client relationships.
Should the LOI state only a total purchase price?
No. Separate closing cash, deferred principal, contingent amounts, retained equity, and service compensation. Define acquired and excluded property, adjustments, and principal conditions. A total without those details can conceal different economics. Both parties should reconcile the proposed consideration before spending heavily on diligence and final agreement preparation.
Does an NDA authorize unrestricted access to tax-client data?
No. Confidentiality terms and the legal basis for disclosure are distinct issues. Scope diligence access with counsel and professional advisers, considering tax-information rules, applicable exceptions or authorizations, security, and permitted uses. Use appropriately limited information and controlled access while confirming what the actual transaction allows at each stage.
Can diligence lead to a revised offer?
Yes, subject to the actual documents and negotiations. Identify the original assumption, new evidence, and proposed economic effect rather than presenting an unexplained reduction. The parties can address the issue, revise terms, or stop under applicable provisions. Clear milestones and documented findings make the decision more useful to both sides.
Which sources support this guide?
Primary rules and guidance support the factual statements in this article. The worked examples and decision frameworks are original educational analysis.
- Seven steps to closing a succession sale — Journal of Accountancy
- Do’s and don’ts of due diligence — Journal of Accountancy
- Common Business Buyer and Business Seller Questions — International Business Brokers Association