What’s an LOI for Buying a Restaurant?

When buying a restaurant, some business brokers will make an offer using a form called a letter of intent while others use a purchase agreement to capture the deal terms. For restaurant buyers, it’s important to know the difference. Here’s a guide to what a purchase agreement does versus a letter of intent along with some alternative explanations of what the term LOI might stand for.

A purchase agreement covers every aspect of the deal leaving virtually no details open for future negotiation. It is accompanied by an escrow deposit that is placed in the hands of an attorney, title company, or another independent third party. Escrow is held subject to the terms between the buyer and seller and is generally covered by a separately executed escrow agreement between the parties and the escrow agent.

Purchase Agreement Contingencies

Offers written on a purchase agreement generally also include contingencies. These are terms required to be fulfilled for the deal to close. The most common contingency is a due diligence period where a buyer may examine all documents on the business, do a physical inspection and satisfy any questions he or she may have about the business.

Other examples of contingencies include items like lending. If the bank turns down the loan for a restaurant buyer, the contract fails, and escrow is returned. Another frequently seen contingency is for lease assignment and assumption. If the landlord turns down the buyer, or fails to assign the same lease terms, the contract could not move forward, and the escrow would be returned. A third common example is for franchise approval. If a franchise is being transferred and the buyer does not get accepted by the brand, the contract could not progress.

These types of contingencies assure that the buyer and seller can both move forward in good faith toward a deal while recognizing that some elements must be completed, like lending or landlord approval prior to closing. Overall, however, it spells out the deal terms and represents a solid understanding between the parties. The value of a purchase agreement is that there is no ambiguity. The seller and buyer cover every element up front. There is no misunderstanding or lack of clarity when it comes to who pays for the inventory, who pays the closing costs, how transfer fees are handled, terms of the remaining franchise or any other elements of the deal.

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What’s an LOI?

A letter of intent or LOI for buying a restaurant, on the other hand, is a much weaker instrument. Most of these agreements do not include all the details but leave items open for negotiation into a subsequent purchase agreement. The creates an extra step in the offer process while also opening every deal term up to ongoing negotiations. Generally, the LOI format does not include escrow or provides for a minor amount. Most critically, the LOI is often non-binding on the parties. In reality, it simply doesn’t do much at all. That’s why we advocate for buyers to be clear in their offers which means that all details should live in a purchase agreement. Here are several alternative descriptions for the acronym LOI.

LOI – Lack of Impact. This definition hits home when it comes to a weak strategy for placing an offer in front of a restaurant seller. Even a strong financial offer, that is otherwise desirable, is less than impactful when it is presented in a format with very loose terms and no earnest money or escrow attached. Some sellers view it as a way to get a “free look” at their business without the binding terms of an agreement. Due diligence is conducted without very much commitment on the buyer’s side while the seller must make everything available. For most sellers, this is not taken seriously and thus results in a lack of impact. Faced with a written purchase offer at a lower price and an LOI at a higher price, most would choose the more serious instrument, the purchase agreement.

LOI - Long-term obligations ignored. Another issue with a letter of intent is that tend to be very short-sighted, in most cases. It gives a buyer the ability to perform due diligence and sets an overall asking price but little else is nailed down. It’s typically left to a couple of attorneys, one battling for the seller’s side and one fighting for the buyer side, to solidify the deal terms. This is all while running the clock on the costs of their legal services. Frequently, the buyer and seller are simply left with no agreement at all and a large attorney bill.

LOI – Loosely organized ideas. Here's another term that fits the acronym LOI. While I’m fond of saying that once we have consent from the buyer and seller, we can nail down the details, a letter of intent is simply too vague to do so. There’s often little understanding of how inventory will be handled. There’s rarely confirmation on how additional fees including deposits and transfer fees might be handled. Rarely have I seen one reference training. Thus, it truly is a set of loosely organized ideas that one hopes will lead to closing.

LOI - Little Official Importance. This is another apt description for a letter of intent. Without a binding agreement between a buyer and seller, there’s very little that’s official about this instrument and rarely do they lead to a successful closing. A purchase agreement is all about making binding agreements with consequences, timelines, and accountability on both sides.

LOI – Largely Overlooked Implications. The overall point of a purchase agreement is to consider all the details of the deal. There are many details in buying a restaurant that can range from ownership of the equipment versus leasing. It can include contracts with third parties like vendors and franchises. There are long term obligations like accounts receivable or liabilities still pending for the seller like unpaid loan balances or gift card balances that must be accounted for. These are generally overlooked implications in an LOI and end up being hammered out in a purchase agreement. An LOI may be short and sweet but tends to overlook a lot of the details.  

LOI – Legal Obligations Incomplete. As already mentioned, a letter of intent frequently leaves gaps in the final details that are then negotiated at hourly rates between a restaurant buyer and seller’s attorney. Covering this up front in the form of a contract is not only a time saver but is also a money saver for both parties.

With all these alternative names for an LOI that seem as if any restaurant buyer would use a purchase agreement instead of an LOI. Why are they still in use? It is not uncommon for buyers to find online document titled “LOI” that they pull from the internet and fill out. They believe this may save them the cost of using an attorney. A better alternative is to simply as your Restaurant Broker if he or she has a document for a purchase agreement in a pre-printed form that captures the deal terms. While your Restaurant Broker may not practice law, they can provide you with a pre-printed agreement that has already been vetted through multiple closings to include the closing details.

Overall, your greatest success in buying a restaurant is to put your best offer forward. The best instrument for that offer is a purchase agreement, not an LOI.

Interested in knowing more about buying a restaurant? Check out our online listings at this link and multiple articles on buying a restaurant here.