FRANCHISE LAW
Letters of Intent in Franchising: When and How They're Used
A letter of intent (LOI) is a short preliminary document that sets out the main terms of a proposed deal before the parties negotiate the full contract. In franchising, LOIs appear in three situations: buying an existing franchise from a current franchisee (a resale or transfer), negotiating an area development or master franchise deal, and locking up real estate for a franchise location. They almost never appear in an ordinary new single-unit franchise sale — the federally mandated Franchise Disclosure Document (FDD) process fills that role instead. The most important thing to understand about any LOI is which parts of it bind you: get that wrong, and a document you thought was a handshake can become an enforceable contract.
This guide covers where LOIs fit in franchising, which provisions are binding, how to avoid accidentally binding yourself, and how an LOI interacts with the FTC’s 14-day disclosure rule.
What a Letter of Intent Is
A letter of intent is a preliminary written agreement that records the key terms of a proposed transaction — price, structure, timeline, conditions — while signaling that the parties intend to negotiate a definitive contract. It is usually a few pages, usually signed by both sides, and usually labeled non-binding as to the deal itself. Its job is to confirm both parties are serious, frame the due diligence period, and prevent wasted negotiation by surfacing dealbreakers early.
Where LOIs Actually Appear in Franchising
LOIs are common in franchise transactions that look like business acquisitions, and rare in transactions that look like standard franchise sales.
Franchise resales and transfers. When you buy an operating franchise from the current owner, the deal proceeds like any small-business purchase: LOI, due diligence, purchase agreement, closing. A franchise resale LOI should expressly condition the deal on franchisor consent to the transfer, address the franchisor’s transfer fee and any required remodel or training, and account for the franchisor’s right of first refusal — many franchise agreements give the franchisor a window to buy the business on the same terms in your LOI. See our tips for buying a franchise resale.
Area development and master franchise deals. Large multi-unit commitments often start with an LOI or term sheet covering territory, unit count, development schedule, and fees before lawyers draft the development agreement. These deals involve enough negotiated, non-standard terms that a framework document earns its keep. For how these structures differ, see single-unit vs multi-unit franchise agreements.
Real estate site control. Franchisees routinely sign LOIs with landlords to hold a site while the lease is negotiated — often a condition of franchisor site approval.
Why new single-unit sales usually skip the LOI. A franchisor selling a new franchise sells on standardized terms already laid out in the FDD and its attached franchise agreement. There is little to negotiate term-sheet-style, and most franchisors simply move qualified candidates through the disclosure process to signing. An LOI would add a document — and legal risk — without adding anything the FDD doesn’t already do.
Binding vs. Non-Binding Provisions
As a general principle of contract law, an LOI can mix enforceable and unenforceable provisions in one document. Well-drafted LOIs say explicitly which is which. The customary split:
| Provision | Usually binding? | Why |
|---|---|---|
| Purchase price and deal terms | No | Subject to due diligence and a definitive agreement |
| Confidentiality | Yes | Protects information exchanged even if the deal dies |
| Exclusivity / no-shop period | Yes | The buyer’s protection for investing in due diligence |
| Governing law and forum | Yes | Must control disputes over the LOI itself |
| Expense allocation | Yes | Each side bears its own costs (or as agreed) |
| Closing timeline | No | Aspirational target, not a deadline |
If the deal terms were binding, the LOI would simply be the contract — which defeats its purpose. The binding pieces exist to protect the negotiation itself.
The Accidental Contract Problem
The danger in every LOI is signing something more binding than you intended. Courts decide whether a preliminary document is an enforceable contract by objective intent — what the words and conduct would convey to a reasonable person — not by what either party privately believed. Texas follows this objective standard: if an LOI contains all the essential terms and reads like a present agreement, a Texas court can enforce it even though the parties planned to sign formal documents later. Conversely, an LOI that leaves material terms open is generally an unenforceable “agreement to agree.”
Practical hedges:
- State expressly that the LOI is non-binding except for specifically listed sections.
- Include a clause that no binding obligation arises until a definitive agreement is signed by both parties.
- Avoid words of present commitment — “agrees to purchase,” “shall sell” — in the non-binding sections; use “proposes” and “would expect.”
- Don’t perform as if a deal exists (transferring money, taking possession) before the definitive agreement is signed.
LOIs and the FTC’s 14-Day Rule
The FTC Franchise Rule (16 CFR Part 436) prohibits a franchisor from accepting any payment or having a prospective franchisee sign any binding agreement in connection with the franchise sale until at least 14 calendar days after the prospect receives the FDD. An LOI’s timing has to respect that rule. A genuinely non-binding LOI signed before disclosure is generally permissible — but a deposit, a binding exclusivity grant running to the franchisor, or LOI language a court would enforce as a purchase commitment can put the transaction on the wrong side of the 14-day window. In resales, the rule’s application depends on the franchisor’s involvement in the sale, but the new franchise agreement you sign with the franchisor still triggers disclosure obligations. The safe sequence: receive and review the FDD first, then paper the deal.
What to Include — and What to Avoid
| Include | Avoid |
|---|---|
| Express non-binding statement with listed exceptions | Words of present commitment in deal-term sections |
| Condition: franchisor consent to transfer | Silence on the franchisor’s right of first refusal |
| Due diligence scope and access | Open-ended exclusivity with no end date |
| Confidentiality terms | Deposits or payments before FDD disclosure |
| Governing law clause | Relying on oral side agreements |
| Expiration date for the LOI itself | Signing without attorney review |
Frequently Asked Questions
What is a letter of intent in franchising?
A letter of intent is a preliminary document recording the main terms of a proposed franchise transaction — most often a resale, transfer, or multi-unit development deal — before the parties negotiate the definitive agreements. It is typically non-binding as to the deal terms but binding as to confidentiality and exclusivity.
Is a franchise LOI legally binding?
Parts of it usually are. Confidentiality, exclusivity, and governing-law provisions are commonly drafted as binding; the deal terms are not. Courts apply an objective test, so an LOI containing all essential terms and commitment language can be enforced as a contract regardless of the label.
Do I sign an LOI when buying a new franchise?
Usually not. New single-unit franchise sales run through the FDD disclosure process on the franchisor’s standard terms, leaving nothing for an LOI to do. LOIs appear when you buy an existing franchise from its owner or negotiate a custom multi-unit deal.
Can I pay a deposit when I sign a franchise LOI?
Not to the franchisor before disclosure. The FTC Franchise Rule bars any payment to the franchisor or its affiliate until at least 14 calendar days after you receive the FDD.
An LOI is short, but the wrong three sentences in it can bind you to a deal you haven’t finished investigating. Reidel Law Firm reviews LOIs, purchase agreements, and FDDs for franchise buyers and sellers on flat fees quoted upfront — talk to a franchise attorney before you sign.
