What an offer letter is, and what you are agreeing to when you sign one
The offer letter is where the deal is actually negotiated. Lawyers also call it a letter of intent. By the time a purchase agreement is drafted, the terms are mostly settled.
What is an offer letter?
An offer letter is a short document setting out the price, structure and timeline of a proposed purchase, signed before either side spends real money. Lawyers call the same document a letter of intent. It is one to four pages, written in plain language, and it exists so both sides find out whether they agree on the important things before paying attorneys to draft a fifty page purchase agreement about them.
Is an offer letter legally binding?
Mostly no, with specific exceptions that are binding on purpose. The commercial terms, price, structure, what is included, are stated as intentions and either side can still walk. A handful of clauses are drafted to bind, and those are the ones to read carefully:
- Exclusivity, which stops the seller talking to other buyers for a set period
- Confidentiality, covering everything you learn during diligence
- Who pays which costs if the deal does not complete
- Any deposit, and the conditions under which it is returned
What should an offer letter include?
Everything that would cause an argument later if it were left vague. A thin offer letter feels faster and costs weeks later. The terms worth settling now:
- The purchase price, and how it was derived
- Whether it is an asset sale or a stock sale
- What is included: equipment, inventory, receivables, the business name, the customer list
- How much is cash at closing, how much is a seller note, and whether there is an earnout
- How working capital will be handled at closing
- The diligence period and the target closing date
- Whether the seller will stay on to help with the transition, for how long, and paid how
- Any non-compete you expect the seller to sign
How long is the exclusivity period?
Thirty to ninety days is normal, and buyers should ask for enough to finish diligence and financing. Exclusivity protects your spending. Without it you can pay for an accountant and an attorney only to find the seller accepted a higher offer in week three. Sellers resist long periods for the same reason buyers want them, so the number lands where the leverage is. If your financing needs sixty days, do not agree to forty five.
What happens after the offer letter is signed?
You start inspecting the business, and the seller's records become genuinely available to you. This is the practical function of the document. Before the offer letter, a seller shares summary financials under an NDA. After it, they open the books, the customer list, the payroll and the lease, because you have demonstrated intent and they have exclusivity in return. Your lender application also begins here.
Can you renegotiate after the offer letter?
Yes, but only for something diligence actually uncovered. Retrading a deal on a fact you already knew, or on nothing at all, is the fastest way to lose a seller's goodwill and often the deal. Retrading on a genuine discovery, a customer that just left, an undisclosed lien, earnings that do not reconcile, is expected and normal. The distinction matters, because sellers talk to each other and to brokers.
What to request after the offer letter is signed, in the order to request it, plus the findings that should make you walk. One email, no course.
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Common questions
Do you need a lawyer to write an offer letter?
It helps, and it is cheaper than it sounds because the document is short. The binding clauses, exclusivity, confidentiality, deposit treatment, are the ones with real consequences, and those are exactly the ones a non-lawyer is most likely to get wrong.
What is the difference between an offer letter and a purchase agreement?
The offer letter states what you intend to do and binds almost none of it. The purchase agreement is the contract that actually transfers the business, and it is binding in full. The offer letter is the outline the purchase agreement is drafted from.
Should you include a deposit with an offer letter?
Sometimes. A deposit signals seriousness and can win exclusivity from a hesitant seller. If you offer one, make sure the letter states precisely what happens to it if diligence goes badly, otherwise you have handed over money with no written route back.
Can a seller accept two offer letters?
Not once one grants exclusivity, which is the point of the clause. Before that, a seller can absolutely be negotiating with several buyers at the same time, and often is.
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