A Practical Guide to Letters of Intent in Dealership M&A
Purpose of this page: a working checklist for dealer principals, CPAs and attorneys reviewing a Letter of Intent (LOI) for a franchised dealership sale. It is meant to be copied, marked up and discussed. A dealership broker or sell-side advisor usually negotiates dealership exit planning the LOI, but the seller should understand every line.
For background on how one sell-side firm handles this stage, MD Johnson, Inc., a firm of auto dealership M&A advisors, says it works with buyers, attorneys and CPAs from LOIs through the Asset Purchase Agreement.
What an LOI is (and is not)
- A short document setting the main terms of a proposed deal.
- Mostly non-binding on price and structure.
- Often binding on a few points: exclusivity, confidentiality, sometimes expenses.
- The template for the much longer Asset Purchase Agreement (APA).
Because the APA builds on it, a loose LOI tends to lead to a hard APA negotiation.
LOI checklist: price and structure
- [ ] Blue sky amount stated clearly, separate from other assets.
- [ ] Treatment of new vehicle inventory (cost basis, which model years).
- [ ] Treatment of used vehicles (appraisal method).
- [ ] Parts and accessories (count method, returnable versus non-returnable).
- [ ] Fixed assets, equipment and furniture.
- [ ] Asset sale or stock sale.
- [ ] Any proposed allocation of the price among assets.
Note for the CPA: the IRS explains on its sale of a business page that the purchase price is generally allocated among the assets sold. Allocation affects the seller's taxes, so flag it at the LOI stage.
LOI checklist: real estate
- [ ] Is the property being purchased, leased, or excluded?
- [ ] If purchased, at what price and on what timeline?
- [ ] If leased, term, rent and options.
- [ ] Who handles environmental review?
LOI checklist: conditions
- [ ] Manufacturer approval as a condition (expected for any franchised buy-sell).
- [ ] Financing contingency, and how firm the buyer's funding is.
- [ ] Due diligence scope and length.
- [ ] Facility requirements the buyer expects from the factory.
LOI checklist: binding terms
- [ ] Exclusivity period length. Shorter usually protects the seller.
- [ ] Confidentiality obligations on both sides.
- [ ] Who pays what expenses if the deal fails.
LOI checklist: people and transition
- [ ] Buyer's intentions for employees.
- [ ] Any role for the seller after closing.
- [ ] Non-compete scope and length.
- [ ] Target closing date.
Why a dealership broker manages multiple LOIs
A single LOI tells you what one buyer will pay. Several LOIs show the market. A managed process aims to bring competing interest so the seller can compare more than headline price: certainty of close, real estate terms and timing. MD Johnson describes preparing a Memorandum of Sale and taking it to qualified buyers before LOIs come in.
Red flags
- A price that seems far above everything else, paired with long exclusivity.
- Vague inventory language.
- No mention of real estate.
- Broad "subject to diligence" language with no limits.
- Pressure to sign quickly.
How LOIs usually differ in practice
Two LOIs with similar headline prices can be very different deals. One may include the real estate at a fair price while the other asks for a long lease at a low rent. One may value used inventory by mutual appraisal while the other sets a fixed formula. One may ask for a short exclusivity window while the other wants months. Lay them side by side, line by line, using the checklist above. The comparison usually makes the stronger offer obvious.
Before you sign
- CPA reviews structure and allocation.
- Attorney reviews binding provisions.
- Advisor compares LOIs side by side.
- Seller confirms the real estate decision.
A careful dealership broker will push for clarity on all of the above before exclusivity starts.
General information only, not legal or tax advice. Have your attorney review any LOI.