What Is a Letter of Intent
A Letter of Intent (LOI) is a preliminary, non-binding document that signals your serious interest in purchasing a franchise and outlines the basic commercial terms you and the franchisor have discussed. It typically comes after initial conversations but before you sign the binding Franchise Agreement. The franchisor must still provide you with a complete Franchise Disclosure Document (FDD) at least 14 calendar days before you sign the LOI or any binding agreement, per FTC regulations.
Role in Due Diligence and Deal Progression
An LOI serves as a checkpoint in your Due Diligence process. It documents what has been verbally agreed to, such as the franchise fee amount, territory rights, renewal terms, and any franchisor obligations specific to your situation. This clarity prevents misunderstandings before legal fees escalate. Once you sign an LOI, you typically have a defined window, usually 30 to 90 days, to complete your review of the FDD, conduct Item 19 analysis (the franchisor's financial performance representations), speak with existing franchisees, and validate the territory's market potential.
The key distinction is this: an LOI is not binding, but it does demonstrate commitment. Some franchisors may request a deposit, typically $5,000 to $25,000, to hold the territory or confirm your seriousness. This deposit may be refundable or applied against the franchise fee if you proceed.
What an LOI Should Address
- Franchise fee: The specific amount you will pay upfront, typically ranging from $25,000 to $75,000 depending on the concept.
- Territory rights: Geographic boundaries, exclusive or non-exclusive status, and any density agreements that affect future unit development.
- Renewal terms: The franchise term length (often 5 to 10 years), renewal periods, and conditions under which renewal is granted.
- Franchisor obligations: Training duration, ongoing support, technology platforms, and marketing contributions the franchisor commits to provide.
- Item 19 access: Confirmation that you will receive audited financial performance data (if available) showing average unit volumes for existing franchisees.
- Conditions and contingencies: Whether approval is contingent on financing, site approval, or other factors.
- Timeline and deposits: When the full franchise fee is due, any holdback periods, and refund provisions.
Common Questions
- Can the franchisor back out after I sign the LOI? Yes, because the LOI is typically non-binding. However, if you have paid a non-refundable deposit, confirm the conditions under which you recover those funds. Always ask if the deposit is refundable if you choose not to proceed after reviewing the FDD.
- Should I have an attorney review the LOI? Yes. Even though it is non-binding, an attorney can flag language that commits you to future terms or obligations you may not have intended. They can also ensure the LOI protects your right to walk away guilt-free if the FDD reveals material discrepancies from what was discussed.
- What happens if the franchisor changes terms between the LOI and the Franchise Agreement? This is common and often frustrating. Your LOI serves as a reference point for negotiations. If significant changes occur, you have the right to request the changes be adjusted or to decline the deal entirely. This is why due diligence during the LOI window is critical.
Red Flags in LOI Negotiations
- Pressure to commit before you receive the FDD or before the 14-day waiting period expires.
- Non-refundable deposits with no clear tie to franchise fee credit or territory hold duration.
- Vague language on territory rights, renewal conditions, or franchisor support commitments.
- No mention of Item 19 or franchisor responses to your questions about existing franchisee performance and satisfaction.
- LOI terms that conflict with the draft Franchise Agreement you later receive.