What Is a Letter of Intent When Buying a Business?

Most buyers spend months finding the right business. Then they find one they want and freeze up when it's time to put something in writing. The letter of intent is what breaks the logjam. It's not a contract. It's not a commitment to buy. It's a framework that says: here's what I'm offering, here's what I need to verify, and here's what we both agree to while we figure out if this deal is real.

I've guided buyers through the LOI process on dozens of transactions. The ones who understand what it is, and what it isn't, move faster and negotiate better.

What a Letter of Intent Is and What It Does

A letter of intent (LOI) is a written document that outlines the key terms of a proposed business acquisition before a formal purchase agreement is drafted. It's typically 2 to 6 pages long, written by the buyer or the buyer's attorney, and submitted to the seller for review and signature.

The LOI does three things:

1. Signals that you're a serious buyer who has actually thought through the deal
2. Establishes the framework for price, terms, and structure before you spend money on legal work
3. Grants you an exclusivity period during which the seller can't negotiate with other buyers

The LOI is not the deal. It's the agreement to work toward the deal. Most experienced buyers and sellers treat the LOI as a good faith outline, not a binding commitment to close. That said, certain provisions inside the LOI are legally binding, and you need to know which ones before you sign.

What an LOI Covers

A well-written LOI covers the following core elements:

Purchase Price

This is the most obvious item. State the total price you're offering, how it's structured (all cash at close, seller note, earnout), and what the price is based on (a multiple of earnings, asset value, or another metric).

Be specific. "Approximately $850,000" is weaker than "$850,000, comprised of $720,000 at close and a $130,000 seller note." The more precise you are, the fewer misunderstandings come up later.

Assets Included and Excluded

Specify what you're buying. Are you buying the business's assets (equipment, contracts, customer lists, intellectual property) or the legal entity itself (the LLC or corporation)?

Most small business acquisitions are structured as asset sales, not stock sales. In an asset sale, you pick and choose what you're acquiring. In a stock sale, you acquire everything, including hidden liabilities. Make it clear which structure you're proposing. For a full breakdown of the implications, see asset sale vs stock sale: what buyers and sellers need to know.

Also list any assets you're explicitly not acquiring. If the owner has a personal vehicle titled to the company that you don't want, note that in the LOI.

Due Diligence Period

State how long you'll have to complete due diligence. Standard ranges are 30 to 60 days for small businesses. During this time, you have the right to review financial records, customer contracts, leases, employee agreements, and any other material information about the business.

You're not committing to buy during due diligence. You're committing to investigate seriously. If something disqualifying turns up, you can walk away.

Exclusivity Period

This is one of the most important provisions in the LOI. More on this in the next section.

Closing Timeline

Provide an expected closing date. This is usually 60 to 90 days from the LOI signing. It gives both sides a target and holds the process accountable.

Binding vs Non-Binding Clauses

This is where most buyers get confused. An LOI is generally described as "non-binding," but that's not entirely accurate. Specific provisions are legally enforceable even if the rest of the LOI is not.

Non-Binding (Typically)

• The purchase price and terms
• The structure of the deal (asset vs stock sale)
• The due diligence requests
• The closing timeline

These are subject to change as you complete your investigation. If you find problems during due diligence, you can renegotiate or walk. The seller can't hold you to the price you wrote in the LOI if the financials come back worse than represented.

Binding (Typically)

• Exclusivity / no-shop clause: The seller agrees not to solicit or entertain other offers during the specified period
• Confidentiality provisions: Both parties agree not to disclose the deal terms or confidential business information
• Break fee or deposit terms: If included, these are typically enforceable
• Expense allocation: Any agreement about who pays for what (appraisals, legal fees, etc.)

Read the LOI carefully. If a clause is labeled "binding" or uses language like "the parties agree," it may be enforceable. Have your attorney review any LOI before you sign, and before you submit one to a seller.

The Exclusivity Clause: Why It Matters for Both Sides

Exclusivity is the provision that says: while you're doing your due diligence, the seller won't shop the deal to anyone else. You get a protected window to complete your investigation without competing with another buyer who might outbid you at the last minute.

For the buyer, exclusivity is critical. Without it, you could spend $5,000 to $10,000 on due diligence, legal work, and a CPA review, only to have the seller accept a better offer from someone else. You've invested weeks of time and money into a deal that was never truly yours.

For the seller, exclusivity is a real concession. They're agreeing to take the business off the market for 30 to 60 days. If the buyer walks, they've lost that time. Sellers agree to exclusivity because the buyer's seriousness justifies it, but they'll push to keep the window as short as possible.

What's a Reasonable Exclusivity Period?

• 30 days: Standard for very simple deals where financials are clean and clean-up is minimal
• 45 days: More typical for $300K to $1M deals with moderate complexity
• 60 days: Appropriate for larger deals, SBA-financed transactions, or businesses with complex structure

Some sellers will negotiate shorter exclusivity periods. If you need 60 days to get SBA financing done and the seller wants to give you 30, that's a conversation worth having before you sign.

How to Structure Your Offer in the LOI

Your offer is more than a price. It's a package. Here's how to think about structuring it:

Base Purchase Price

The starting point. Set this based on your valuation work. If you've read through how to value a business and run your own numbers, you'll have a defensible figure. Don't anchor too high or you're stuck. Don't go so low you insult the seller before the conversation starts.

Seller Note

Offering to let the seller carry a portion of the price (10% to 30%) signals confidence and can actually make the offer more appealing, because it shows you expect the business to perform. It also reduces the amount you need from a bank. See our post on seller financing for how this works in practice.

Earnout Provisions

An earnout ties a portion of the purchase price to future performance. Example: $800,000 base price, plus $100,000 additional if revenue hits $1.2 million in year one. Earnouts are useful when there's disagreement about what the business will earn under new ownership. They're also contentious if poorly written, so define the metrics precisely. Read more about how an earnout works and when to accept one before agreeing to one.

Training and Transition Period

Specify that the seller will remain available for 30 to 90 days after closing to train you, introduce you to key customers, and support the handoff. This is standard in small business deals and protects you from a seller who disappears the day after they cash the check.

Financing Contingency

If your offer depends on SBA or other financing, say so explicitly. A financing contingency means the deal can be unwound if your loan doesn't come through. Without this, you could be in a difficult position if the bank says no.

Before you include a financing contingency, make sure you actually understand what structure you're pursuing. If you haven't talked to a lender yet, do that before you submit the LOI. See your financing options on our funding page to understand what SBA loans, seller notes, and hybrid structures look like in practice.

Common LOI Mistakes Buyers Make

I've seen buyers torpedo good deals with poorly written LOIs. Here's what to avoid:

Being Too Vague

"Purchase price to be negotiated" or "terms TBD" isn't an LOI. It's a placeholder. If you're not ready to put numbers on paper, you're not ready to submit an LOI. Sellers want specificity. Vague offers get ignored.

Offering Too Low in Bad Faith

There's a difference between a negotiated price and an insult. If you offer 2x earnings for a business trading at 4x in its industry with no justification, the seller will either ignore you or use your offer to reset the relationship in a negative direction. Anchor your offer to the market and explain your reasoning.

Skipping the Financing Contingency

If you need a loan to close this deal and you don't include a financing contingency, you may be legally obligated to close even if the bank turns you down. Always protect yourself.

Missing the Exclusivity Language

Some buyers submit LOIs without asking for exclusivity. Then they spend 45 days doing due diligence while the seller keeps the listing active and fields other offers. Get exclusivity in writing, every time.

Not Reviewing It with an Attorney

An LOI is a legal document with binding provisions. Submitting one without an attorney review costs you nothing in legal fees upfront but can cost you significantly if a dispute arises.

How to Use the LOI to Negotiate Without Burning Bridges

The LOI is where deal terms are established, but it's also where relationships are either built or broken. Most sellers have spent years building their business. They're emotionally invested. How you negotiate affects whether they want to do business with you.

Some practical guidance:

• Explain your offer. If you're coming in below the asking price, give a brief rationale. "Based on the trailing three-year average EBITDA and the current industry multiple range, my offer reflects..." is far better than a number with no context.
• Don't nickel and dime everything. Pick the battles that matter financially. Negotiating heavily on price and then coming back to negotiate every clause in the asset purchase agreement wears sellers down.
• Keep the tone collaborative. You're not adversaries. You're two people trying to get a deal done. Aggressive or dismissive language in an LOI creates friction that persists through closing.
• Be responsive. If a seller counters your LOI, respond within 24 to 48 hours. Silence is interpreted as disinterest or disorganization.

What Happens After the LOI Is Signed

Once both parties sign the LOI, the due diligence clock starts. The LOI stage is a critical point in how to sell a business in 6 months — getting it signed efficiently keeps the entire timeline on track. Here's what happens next:

1. Document request list: You send the seller (or their broker) a formal request for financial records, leases, contracts, licenses, and other materials
2. Financial review: You or your CPA reviews 3 years of tax returns, P&L statements, and balance sheets
3. Operational review: You evaluate the team, systems, customer relationships, and physical assets
4. Lender engagement: If you're using SBA financing, you submit your full loan application with the business financials
5. Legal review: Your attorney begins drafting the asset purchase agreement (APA) based on the LOI terms
6. Renegotiation if needed: If due diligence surfaces material issues, you may revisit the price or terms
7. Final agreement and closing: Once the APA is signed and financing is in place, you close

For a detailed breakdown of what to investigate during this window, our due diligence checklist is a practical starting point.

Ready to put an offer together? Contact me before you submit your LOI and I'll help you structure it so it protects your interests without killing the deal.

LOI vs Purchase Agreement: The Difference

Buyers sometimes confuse these two documents. They're not the same.

The purchase agreement (also called an asset purchase agreement or APA) is the final, binding contract that governs the sale. It includes representations and warranties from both sides, indemnification provisions, non-compete clauses, and detailed schedules of what transfers at close.

The LOI is a rehearsal. The APA is the performance.

Common Mistakes in the LOI Process

• Submitting an LOI without running the numbers yourself first
• Forgetting to include a financing contingency when you need a loan
• Not asking for exclusivity, or accepting too short an exclusivity window
• Making the transition period too vague (say "60 days of full-time seller support" not just "training")
• Not specifying what happens to the deposit if due diligence reveals a deal-breaker

Your Next Steps

If you're ready to submit an LOI, here's my suggested checklist:

• Confirm your valuation and make sure the price is defensible (use our business valuation calculators to run the numbers before you submit)
• Decide on deal structure (asset sale vs stock sale, cash plus seller note, earnout if appropriate)
• Identify your financing plan and include a contingency if needed
• Set a due diligence period of 45 to 60 days minimum
• Request exclusivity for the full due diligence window
• Have an attorney review before you submit

If you want to buy a business but haven't started building your team (attorney, CPA, broker), now is the time. These professionals earn their fees by catching problems early.

Want help putting together a strong first offer? Reach out for a free deal review and I'll walk you through what a solid LOI looks like for your specific situation.

FAQ

Q: Is an LOI required to buy a business?

Technically no, but practically yes. Without an LOI, you have no exclusivity and no agreed framework for the deal. You could go straight to a purchase agreement, but most sellers and their advisors expect an LOI first. It's the standard in the industry.

Q: How long does it take to negotiate an LOI?

Usually 1 to 2 weeks from initial submission to both parties signing. Simple deals with aligned expectations can move in a few days. Deals where the buyer and seller are far apart on price may take 2 to 3 weeks of back and forth.

Q: Can a seller back out after signing an LOI?

On the non-binding provisions, yes. A seller can choose not to proceed even after signing an LOI. However, if the LOI includes binding provisions (exclusivity, confidentiality, deposit terms) and the seller violates them, there may be legal recourse. This is why LOI language matters.

Q: Should I pay a deposit with my LOI?

In most small business transactions, a deposit is not required at the LOI stage. Some deals include a small good faith deposit ($5,000 to $25,000) that's refundable if due diligence reveals material issues. Larger transactions may require a larger deposit. Negotiate this carefully and define the refund conditions explicitly.

Q: What's the difference between an LOI and a term sheet?

They're essentially the same document with different names. "Term sheet" is more common in investment and private equity transactions. "Letter of intent" is more common in small business acquisitions. Both serve the same purpose: outlining proposed deal terms before a formal agreement is drafted.