Direct answer
A Letter of Intent (LOI) is a written document outlining the proposed terms of a business sale before the definitive purchase agreement is drafted. It includes purchase price, deal structure, key conditions, and an exclusivity period. Most of the LOI is non-binding, but a few provisions (exclusivity, confidentiality, expense responsibility) are binding. Functionally, the LOI locks the deal in — terms agreed at LOI become very difficult to renegotiate during due diligence.
What the LOI does
The LOI converts a verbal agreement into a written framework that everyone proceeds from.
Before the LOI, the deal exists as conversations, emails, and a handshake. After the LOI, the deal exists as a documented set of agreed terms that the lawyers will turn into a binding purchase agreement. The LOI is the bridge between exploration and execution.
What an LOI includes
A standard LOI runs 3 to 8 pages and covers price, structure, conditions, and process.
Typical contents:
- Purchase price. The headline number, plus any contingent components (earnout, holdback).
- Deal structure. Asset purchase or stock purchase. Cash-free, debt-free. Working capital target.
- Payment terms. What is paid at closing, what is held in escrow, what is paid over time (seller note, earnout).
- Financing condition. If buyer is using SBA or bank financing, the LOI conditions closing on financing approval.
- Due diligence period. Typically 60-90 days from LOI signing.
- Exclusivity / no-shop. The seller agrees not to negotiate with other buyers during the diligence period.
- Confidentiality. Often references the existing NDA.
- Expense responsibility. Who pays for what (diligence costs, legal fees, breakup fee if any).
- Target closing date. A realistic date, not aspirational.
- Conditions to closing. Buyer financing approval, satisfactory diligence, third-party consents.
- Reps and warranties framework. The shape of what the seller will rep at closing.
- Non-compete and transition terms. Owner role post-closing, length of transition, scope of non-compete.
What is binding and what is not
Read the binding section carefully. Everything else is intent, but the binding section creates real obligations.
A well-drafted LOI explicitly identifies which sections are binding. Typically:
- Binding: exclusivity, confidentiality, expense terms, breakup fees, governing law and dispute resolution.
- Non-binding: purchase price, deal structure, payment terms, target closing date, conditions, reps and warranties.
The non-binding sections are still consequential because they are functionally hard to change. Once the buyer has signed an LOI with specific terms and started spending money on diligence, neither party wants to renegotiate. The terms in the LOI become the gravitational pull for the definitive agreement.
The exclusivity period
Exclusivity is what the buyer is buying with the LOI. The length and the carve-outs matter.
The buyer needs exclusivity because they are about to spend $25K-$75K on third-party diligence. They cannot do that work knowing the seller might accept another offer.
Typical exclusivity is 60-90 days. Shorter for cleaner businesses; longer for complex diligence. The seller should negotiate:
- The length (shorter is better for the seller)
- Auto-extension only with mutual agreement
- Termination rights if the buyer is not progressing
- Specific carve-outs (existing unsolicited offers, board fiduciary duties)
Items to negotiate carefully at LOI
Push back on these at LOI stage. Renegotiating in diligence is much harder.
- Working capital target. Often glossed over but can move millions. Insist on a defined methodology, not a blank reference to a future calculation.
- Earnout structure. Earnouts are sources of litigation. If accepting one, define the metric, the measurement, and seller protections during the earnout period.
- Escrow holdback size and duration. Standard is 10 percent for 12-18 months. Above that range, push back.
- Rep survival period. 12-24 months is standard. Buyers may ask for 36+ months; resist.
- Non-compete scope. Geographic and industry scope, plus duration (typically 3-5 years). Too broad makes it unenforceable; too narrow gives the buyer nothing.
- Asset vs stock structure. Affects taxes substantially. Get your CPA involved at LOI, not after.
What a bad LOI looks like
Warning signs:
- Vague working capital language (will be determined later)
- Earnout with no defined metric or measurement process
- Excessive escrow (20 percent or more for extended periods)
- Open-ended diligence period
- Non-compete scope that effectively prevents you from working anywhere
- Conditions that give the buyer unilateral walk rights at will
Frequently asked questions
Can a seller back out of an LOI?
During the exclusivity period, the seller is contractually bound not to negotiate with other buyers but is generally not bound to close the deal at the LOI terms. The seller can typically refuse the final definitive agreement if terms differ materially from the LOI — but cannot shop the deal during exclusivity.
Should I sign an LOI without a lawyer?
No. Even though most of the LOI is non-binding, the structure shapes the entire deal. A few hours of M&A counsel time at LOI stage saves substantial time and money later.
Can I receive multiple LOIs?
Yes, before signing any of them. Once you sign one with exclusivity language, you have committed not to actively pursue others during the exclusivity period. Many sell-side processes are designed to generate multiple LOIs before selecting one.
What happens if diligence finds problems?
Most LOIs allow the buyer to reduce price or walk if material problems are found in diligence. The exact threshold depends on the LOI language. Sophisticated LOIs define what constitutes a material adverse change.
How long does it typically take to go from LOI to closing?
60-120 days is typical. SBA-financed deals tend toward the longer end. Deals with complex diligence (regulated industries, environmental issues) can run longer.
This article is general educational information and not financial, tax, or legal advice. Specific transactions require your own attorney, CPA, and an experienced M&A advisor.