Chapter 7: Negotiation, letter of intent and purchase agreement
From offer to signature: how to negotiate as a buyer, what a letter of intent (LOI) and purchase agreement should contain, and which warranties to seek.
4 min readUpdated
Once you have found the business, assessed the price and talked to the bank, the negotiation begins. It usually happens in three steps: an offer, a letter of intent that sets out the main terms, and finally a purchase agreement that makes the deal binding. This chapter goes through each step from the buyer’s side and the points you need to have in place before you sign.
The offer
A good offer is more than a price. It shows who you are, how you will pay and which conditions you attach. That makes the offer concrete and easier for the seller to accept. On Sitavo you can make an offer directly on the listing, with terms such as handover date, payment method and conditions. See How to make an offer on a business.
- Price and payment: how much is paid in cash, how much as a seller loan or earn-out, and when?
- Conditions: financing, satisfactory due diligence, the lease and consent from key contract parties, each with a deadline.
- Handover: your preferred handover date and how long the seller should help afterwards.
- About you: briefly about your background and how the financing is planned.
Bidding rounds and auctions
If the business is sold in a bidding round or at auction, read the terms first. In an auction the bids are binding and cannot be withdrawn, so due diligence and financing must be in place before you bid. See Bidding rounds and auctions.
The negotiation
Negotiate the whole package, not just the price. A slightly higher price with seller financing, a longer transition period or better warranties can be worth more to you than a lower figure. Back your demands with facts from your review, and remember that you and the seller will often have to work together for a while after the handover. Know your maximum price and be ready to walk away if it is exceeded.
The letter of intent (LOI)
A letter of intent, or LOI, sets out the terms you agree on before the thorough due diligence and the purchase agreement. The main terms are usually not binding, but provisions on confidentiality and exclusivity can be. It typically contains:
- The price, payment method and any seller financing or earn-out.
- Whether the deal is an asset purchase or a share purchase.
- Conditions for financing and due diligence, with deadlines.
- The expected handover date and the seller’s role afterwards.
- Exclusivity: a period in which the seller does not negotiate with others.
- Confidentiality, and what is binding and what is not.
If the seller has chosen a letter of intent on the listing, the first step of the deal on Sitavo is that you both accept it. Sitavo has a free template for a letter of intent.
The purchase agreement
The purchase agreement, also called the transfer agreement, is the document that makes the deal binding. It must be precise, because it is what you can refer to if something goes wrong.
| Item | What you need to make sure of |
|---|---|
| What is being bought | A precise list of assets or description of the shares. Name, domains, code, accounts and rights included. |
| Price and payment | Amounts, dates, seller loan, earn-out and what happens if payment is not made. |
| Handover date | When risk, operations and income pass to you. |
| Settlements | How stock, prepayments, receivables and wages are settled on the handover date. |
| Warranties | The seller’s statements about accounts, taxes, agreements, disputes and assets. |
| Liability and time limits | For how long and how much the seller is liable if a warranty is wrong. |
| Conditions | Financing, consent from the landlord or key customers and other matters that must be fulfilled. |
| Staff | Who transfers, and how obligations such as holiday pay are divided. |
| Non-compete clause | That the seller does not start a competing business or take customers with them for a period. |
| Transition period | How long the seller helps, to what extent and at what price. |
Warranties and retained purchase price
The warranties protect you against what due diligence did not find. If you are worried whether the seller can pay if a warranty turns out to be wrong, you can agree that part of the price is held back or placed in escrow for a period. In a share purchase the warranties are especially important, because you take over the company’s entire history.
Earn-out and seller financing in the agreement
If an earn-out or a seller loan is part of the deal, the agreement must describe the targets, how they are measured, the interest, repayments, security and what happens in the event of default. Read Earn-out and Financing a business acquisition for the pitfalls.
Agreements and templates on Sitavo
In the document library you will find free templates for a confidentiality agreement, a letter of intent and purchase agreements for asset and share transfers. If the seller has chosen Sitavo’s agreements, the purchase agreement, asset list and transfer declaration are filled in with the deal’s details when the deal starts. The agreement is only concluded once you have both confirmed it. The whole process is described in The deal process step by step.
Have the agreement reviewed
Templates are a good starting point, but they do not know your deal. In larger deals, share purchases and businesses with staff or a lease, a lawyer should review the agreement before you sign. Find one among the Sitavo advisers. The next chapter is about the handover.
Frequently asked questions
At a minimum: the parties, what is being bought, the price and payment, the handover date, how stock and other items are settled, the seller’s warranties, conditions for the deal, staff, a non-compete clause and the seller’s help during a transition period. Have a lawyer review the agreement in larger deals.
Usually the main terms are not binding, but provisions on, for example, confidentiality and exclusivity can be. It depends on the wording, so state clearly what is binding and what is not.
Typically conditions on financing, satisfactory due diligence, transfer of the lease and consent from key contract parties. Give each condition a deadline. In an auction with binding bids you cannot attach conditions.
Warranties are the seller’s written statements about, for example, accounts, taxes, agreements and disputes. If a warranty turns out to be wrong, you can claim compensation under the agreement’s rules. The more thorough the warranties, the better you are protected against what due diligence did not find.
Sitavo has free templates for a letter of intent, a confidentiality agreement and purchase agreements for asset and share transfers in the document library. If you trade through Sitavo, the agreements can be filled in with the deal’s details.
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