Thinking about buying or selling a Texas business? You'll need to negotiate a letter of intent before drafting the purchase agreement.
Here’s what many business owners do not realize: certain provisions in a letter of intent can be legally binding – even when the document is labeled “non-binding.” Understanding which provisions courts will enforce – and which won't – protects your interests throughout the transaction and prevents mistakes that could lead to M&A lawsuits.
What Is a Letter of Intent?
A letter of intent (LOI) to purchase a business is a written agreement outlining preliminary terms between parties before entering into definitive negotiations and sharing critical, often confidential, information.
LOIs help parties align expectations and identify key terms before investing significant time and money into a deal.
Is a Letter of Intent Binding and Enforceable in Texas?
Whether an LOI is binding depends primarily on how it is drafted and the parties’ expressed intent.
Non-Binding LOIs
Many letters of intent explicitly state they're non-binding and serve only as preliminary negotiations. Texas courts normally honor these disclaimers when clearly stated. Parties are generally free to walk away from non-binding provisions without legal consequence, although doing so may have reputational or commercial implications.
Partially Binding LOIs
Most well-drafted LOIs contain both binding and non-binding provisions. This structure gives parties flexibility on substantive deal terms while protecting specific interests.
Common binding provisions include:
- Confidentiality and non-disclosure obligations
- Exclusivity periods (no-shop clauses)
- Good faith negotiation requirements (if clearly defined and expressly designated as binding)
- Terms governing access to information during due diligence
- Allocation of transaction costs if the deal falls through
- Dispute resolution procedures
Fully Binding LOIs
If an LOI contains all material terms and reflects a clear intent to be bound, Texas courts may enforce it as a binding contract, even if the parties planned to sign more formal documents later. This usually happens when parties sign the LOI, begin performance, and treat it as the governing agreement. Because of this risk, parties should be cautious about beginning performance or publicly acting as if the transaction is finalized before definitive agreements are executed.
Letter of Intent vs. Purchase Agreement: What's the Difference?
The LOI is your preliminary handshake. It outlines basic deal terms – price, structure, timeline – and typically includes a few binding provisions (confidentiality, exclusivity, good faith negotiation). LOIs are less detailed, focusing on whether the parties can agree on fundamental terms before investing significant time and money. Most of the LOI remains non-binding, giving both parties flexibility to walk away if due diligence reveals problems.
The purchase agreement is your binding contract. This comprehensive document (often dozens of pages) includes detailed representations and warranties about the business (documented in a disclosure schedule), indemnification provisions protecting both parties, specific closing conditions that must be satisfied, escrow and holdback terms, and post-closing obligations like non-compete agreements. Every provision in a purchase agreement is legally binding and enforceable.
Looking to Purchase a Business in Texas? Why Buyers Should Require an LOI
If you're buying a Texas business, an LOI serves several strategic purposes beyond just outlining price and terms.
Securing Exclusivity While You Investigate
A well-drafted LOI typically includes an exclusivity period – often 30 to 90 days – during which the seller agrees not to negotiate with other potential buyers. This "no-shop" clause protects your investment in due diligence. Buyers often spend significant time and money reviewing financial records, contracts, and operations. Without exclusivity, the seller could use your due diligence efforts to negotiate with other buyers or gain leverage in parallel discussions.
Establishing the Transaction Framework Early
Your LOI sets the basic structure of the deal: asset purchase versus stock purchase, which assets and liabilities transfer, working capital adjustments, and earnout provisions. Getting agreement on these fundamentals early prevents wasted time drafting detailed agreements for a structure the seller won't accept in the end.
Creating Momentum and Accountability
Once both parties sign, the LOI becomes the framework and timeline that keeps negotiations moving forward. Without this structure, discussions can drag on indefinitely while both parties pursue other opportunities.
Protecting Confidential Information
Business acquisitions require sharing sensitive financial data, customer lists, trade secrets, and operational details. The confidentiality provisions in your LOI – which should be binding even if the rest is non-binding – prevent the seller from disclosing or misusing information you share during due diligence.
Why Texas Business Sellers Should Require a Letter of Intent
As a seller, you might wonder if an LOI benefits you or just locks you into terms favoring the buyer. A properly negotiated LOI actually protects sellers while moving the transaction forward.
Qualifying Serious Buyers
Requiring an LOI separates serious buyers from tire-kickers. A buyer willing to commit to an exclusivity period and put proposed terms in writing is more likely to be financially prepared and serious about closing, although financing contingencies should still be addressed expressly. This saves you from sharing sensitive business information with buyers who can't close or aren’t fully committed to purchasing a business.
Maintaining Leverage During Negotiations
An LOI doesn't eliminate negotiating power – it focuses it. Rather than revisiting the basic deal outline repeatedly, you can concentrate on nailing down the details that protect your interests like representations and warranties, indemnification, earnouts, and escrow terms.
Creating Exit Timeline Certainty
If you're planning retirement, have another opportunity lined up, or need liquidity by a certain date, the LOI establishes a timeline for closing. This matters if you're coordinating the sale with other life events or business opportunities.
Controlling Information Flow
The binding confidentiality provisions in your LOI let you control how buyers can use the information you share. You can require return of materials if the deal falls through, and prohibit the buyer from soliciting your employees or customers during due diligence.
What Are Key Components of a Letter of Intent?
A well-drafted Texas LOI typically addresses these elements:
Identification of Parties
Legal names of all individuals or entities involved, including the correct corporate entity names. Using the wrong entity can create enforceability problems later.
Transaction Structure
Basic framework of the proposed deal: asset purchase, stock purchase, merger, or other structure. For business acquisitions, specify which assets and liabilities are intended to transfer.
Proposed Terms
Price, payment terms, earnouts or contingent payments, seller financing (if applicable), and working capital adjustments. Be specific enough to demonstrate serious intent but preserve flexibility for due diligence discoveries.
Timeline
Proposed schedule for due diligence, negotiation of definitive agreements, and closing. Include milestone dates to maintain momentum.
Contingencies
Conditions that must be satisfied before moving forward, such as:
- Completion of satisfactory due diligence
- Obtaining financing or investor approval
- Board of directors or member approval
- Regulatory clearances or third-party consents
- Landlord consent to lease assignment
Non-Binding Statement
Clear language stating that the LOI is generally non-binding and represents preliminary negotiations only, except for specifically designated binding provisions.
Binding Provisions
Clearly identified sections intended to be legally binding:
- Confidentiality and non-disclosure obligations
- Exclusivity period during which the seller won't solicit or negotiate with other buyers
- Terms governing the buyer's right to access information and inspect operations
- Allocation of due diligence costs and transaction expenses
- Return of confidential materials if the transaction doesn't close
Termination Provisions
Circumstances under which either party may walk away without penalty. This might include failure to satisfy contingencies by certain dates, material adverse changes in the business, or inability to reach agreement on definitive documents.
Governing Law
Statement that Texas law will govern interpretation and enforcement of the LOI. Also specify venue and jurisdiction, including the Texas county in which disputes will be resolved.
Texas LOI Timeline: From Signing to Closing (60-150 Days)
Once both parties execute the LOI, expect a 60- to 150-day process from signing to closing for most small to mid-market Texas business acquisitions. Understanding this timeline helps you plan and maintain momentum toward closing.
Phase 1: Immediate Actions (Week 1)
Buyers should assemble their due diligence team(M&A attorney, CPA, industry consultants), share the LOI with your attorney to begin drafting the purchase agreement, and request the due diligence materials list from the seller.
Sellers should gather financial records, contracts, and operational documents, notify key advisors (attorney, CPA) and provide them a copy of the LOI, and brief employees involved in due diligence about confidentiality requirements.
Phase 2: Due Diligence Period (Weeks 2-8)
The buyer conducts a thorough investigation of the business while the seller provides access to records, facilities, and key personnel. Common due diligence areas include financial statements and tax returns, customer and supplier contracts, intellectual property rights, real estate leases and property titles, employment agreements and benefit plans, regulatory compliance and permits, pending litigation, and environmental assessments.
Phase 3: Definitive Agreement Negotiations (Weeks 4-12)
While due diligence proceeds, attorneys draft the comprehensive purchase agreement and disclosure schedule addressing representations and warranties, indemnification provisions, escrow terms, closing conditions, and post-closing covenants. Expect negotiations to intensify during this period as due diligence discoveries often lead to price adjustments or additional obligations.
Phase 4: Pre-Closing Activities (Final 2-4 Weeks)
Both parties work to satisfy closing conditions – obtaining third-party consents, securing financing, making required regulatory filings, and preparing closing documents. Your attorney prepares the closing checklist and coordinates with all parties to ensure documents are signed and funds are ready to transfer on the closing date.
Common Timeline Factors
What accelerates closing: Well-organized seller records, pre-approved buyer financing, minimal third-party consent requirements (triggered by assignment clauses in contracts with landlords, key suppliers, and lenders, for example), simple business structure, motivated parties, and experienced M&A attorneys managing the process.
What causes delays: Due diligence discoveries requiring price renegotiation, difficulty obtaining third-party consents, poorly maintained books and records, financing difficulties, title issues, employee or customer retention concerns, and disputes over terms.
When to Get an Attorney Involved in a Business Transaction
The simple answer: before you sign anything. Many business owners make the costly mistake of negotiating and signing an LOI without legal counsel, thinking they'll bring in attorneys later for the "real" contract. This approach creates several problems.
Why you need an attorney from the start:
- Protecting Your Negotiating Position. Terms you agree to in the LOI become difficult to renegotiate later. If you concede important points before involving your attorney, you've limited your options for the definitive agreement. Your attorney can advise which terms to settle in the LOI and which to leave flexible.
- Avoiding Unintended Binding Obligations. Without proper legal drafting, you might inadvertently create binding obligations on terms you thought were preliminary. Or you might fail to make confidentiality and exclusivity provisions binding when they need to be. Texas courts will enforce what you sign, regardless of what you intended.
- Identifying Missing Protections. Experienced business attorneys know which provisions matter most in different transaction types. They can spot gaps in template LOIs that leave you exposed. For business acquisitions, this might include non-solicitation of employees, allocation of due diligence costs, or handling of deposits.
- Ensuring Compliance with Texas Law. Some transactions have specific legal requirements that should be addressed in the LOI. Certain entities, such as professional corporations (PCs) and professional limited liability companies (PLLCs), may require buy-sell provisions that comply with the Texas Business Organizations Code. Healthcare transactions must address federal and state regulatory requirements. Real estate deals need proper legal descriptions.
Can You Sue (or Be Sued) Over a Letter of Intent in Texas?
Yes, parties can sue over letters of intent in Texas under certain circumstances.
Understanding when LOIs can lead to litigation can help you avoid mistakes and unintended obligations from the start.
Breach of Binding Provisions
Even in otherwise non-binding LOIs, some provisions specifically designated as binding can be enforced through litigation.
- Confidentiality violations occur when the other party discloses your confidential information to competitors, uses it for their own benefit, or fails to return materials after the deal terminates. You can sue for breach and seek injunctive relief to prevent further disclosure.
- Exclusivity violations happen when a seller negotiates with other buyers during the no-shop period or solicits competing offers. The buyer can sue for breach, potentially recovering due diligence costs wasted when the seller wasn't negotiating in good faith.
- Bad-faith negotiation claims arise when an LOI includes binding obligations to negotiate in good faith, but one party uses deliberately unreasonable tactics. Courts will intervene if a party was never serious about closing or used the LOI period to extract confidential information for competitive purposes.
The Consequences: In the event of a breach of a binding provision, the non-breaching party can recover direct damages (due diligence costs, opportunity costs), transaction expenses incurred in reasonable reliance on the LOI, and potentially lost profits, but only if provable with reasonable certainty under Texas law.
Courts can also issue injunctive relief to prevent ongoing breaches, particularly for confidentiality violations or solicitation of employees. If the LOI includes a fee provision, the prevailing party can recover attorney's fees and litigation costs.
Other Legal Claims
- Promissory estoppel may provide recovery even if the LOI wasn't fully binding, if the other party made clear promises, you reasonably relied on those promises to your detriment, and injustice can only be avoided by enforcement. For example, if a seller promises exclusivity, you incur substantial due diligence costs, and the seller then sells to someone else, you might recover your costs even if the exclusivity provision wasn't properly drafted as binding.
- Fraud or misrepresentation claims apply when a party makes material misrepresentations during LOI negotiations – such as providing false financial information, concealing material problems, misrepresenting authority to enter the transaction, or lying about other offers.
Texas Letter of Intent Attorney: Protecting Your Business Interests
At Hendershot Cowart P.C., our business attorneys understand the nuances of Texas contract law and how to structure LOIs that protect your interests while maintaining deal momentum.
Whether you're buying a business, selling your business, or entering into a major commercial transaction, don't navigate the LOI process alone. The cost of professional legal guidance is minimal compared to the potential consequences of poorly drafted preliminary agreements.
Call us today at (713) 783-3110 or contact us online to speak with a Texas business and M&A attorney and discuss how we can support your transaction and business goals.