Letter of Intent (LOI) Explained: What to Include, What to Negotiate, and What Happens Next
A letter of intent — also called an LOI, term sheet, or indication of interest — converts exploratory conversations into a real negotiation. It's the bridge between "I'm interested in buying your business" and the formal purchase agreement. Get it right and you set the tone for everything that follows. Get it wrong and you're either losing the deal or locked into terms you can't undo without goodwill and legal fees.
What an LOI Is (and What It Isn't)
An LOI is mostly non-binding. Both parties agree in principle on price, structure, and key terms, but neither is legally obligated to close. It signals serious intent and creates a working framework — it doesn't lock anyone in.
Except for a handful of provisions that are binding, and these matter a lot:
- Exclusivity / no-shop clause — the seller agrees not to talk to other buyers for a defined period
- Confidentiality — both parties keep the deal and shared information private
- Costs and expenses — each party bears its own legal/accounting costs unless the LOI says otherwise
- Governing law — which state's law governs disputes
Everything else — price, structure, financing contingencies, reps and warranties, closing conditions — is non-binding and subject to the final purchase agreement. This is normal and expected.
What a Well-Written LOI Covers
Purchase price and structure
State the total consideration clearly: $X purchase price, paid as $Y at closing + $Z seller note + $W earnout. Specify asset purchase or stock purchase right here. Don't leave structure ambiguous — sellers default to assuming stock (cleaner taxes for them), buyers default to assuming assets (cleaner liability exposure for them). That gap becomes a fight in the purchase agreement if you don't resolve it in the LOI.
What's included and excluded
In an asset purchase, list the major asset classes included (equipment, inventory, customer lists, IP, trade name, goodwill) and anything explicitly excluded (the seller's AR as of closing, cash in bank, real estate if not part of the deal, pending litigation). Surprises at the purchase agreement stage — "I thought the delivery vehicles were included" — kill deals and destroy trust.
Earnout terms (if any)
If any portion of the price depends on future performance, define it in the LOI: the metric (revenue, EBITDA, customer retention), the measurement period, the payment schedule, and the cap. Earnout disputes are the most litigated area of M&A — the more specific the LOI, the better the final purchase agreement.
Seller financing terms
If the seller is carrying a note, the LOI should specify the amount, interest rate, term, amortization schedule, and security (personal guarantee, lien on assets). These are terms the seller will expect you to honor — don't leave them vague.
Due diligence period
Define how long you have to complete due diligence — typically 30 to 60 days for a small business. The LOI should give you the right to terminate for any reason during this window (a "due diligence out"). Without it, you're contractually on the hook for a deal before you've seen three years of tax returns. That's a bad position.
Closing conditions
Common conditions: financing approval (SBA loan, if applicable), landlord consent to lease assignment, key employee retention, transfer of licenses. List any condition that, if unfulfilled, would cause you to walk. This protects you if a critical contract doesn't transfer or the SBA denies the loan.
Transition period
Most deals include a seller training and transition period: the seller stays on for 30—90 days post-closing to transfer relationships and institutional knowledge. Specify it in the LOI so it's not a last-minute negotiation point in the purchase agreement.
Non-compete agreement
The seller should agree not to open a competing business in the same geography for a defined period — typically 3 to 5 years within a reasonable geographic radius. If the seller's network is a key asset, the non-compete is what makes that network yours.
Exclusivity: The Most Negotiated LOI Term
Exclusivity — also called a no-shop clause — means the seller stops marketing the business and won't entertain other buyers for a defined period, usually 30 to 90 days. It's the buyer's most valuable LOI protection. Without it, a seller can use your offer to shop for a higher bid while you're paying accountants and attorneys to verify the deal.
Sellers push back for exactly that reason. The practical compromise: anchor the exclusivity window to your actual due diligence timeline. Need 60 days for diligence and SBA approval? Ask for 75. Deals slip. Build in the pad.
A seller who refuses any exclusivity whatsoever is a yellow flag. They're telling you they plan to run a parallel process while you spend money. Walk carefully, or just walk.
The Gap Between LOI and Closing
Signing an LOI is the beginning of the most intensive phase of the deal, not the end. What happens next:
- Due diligence — you (and your accountant/attorney) verify financial statements, customer contracts, employee agreements, legal status, tax compliance, physical assets, and anything else material to the deal. See the due diligence checklist for a full breakdown.
- SBA or lender approval (if applicable) — if you're using an SBA 7(a) loan, the lender underwrites the business. This takes 30—60 days and can kill the deal if the lender's valuation comes in below the purchase price.
- Purchase agreement drafting — your attorney converts the LOI terms into a legally binding purchase agreement. This is where the reps, warranties, indemnification, and closing mechanics get documented.
- Closing conditions cleared — lease assignment approved, licenses transferred, lender funds confirmed, sellers sign off.
- Closing — funds transfer, keys change hands, transition begins.
Small business acquisitions typically close 60 to 120 days after LOI signing. SBA deals run longer — 90 to 150 days is common once you factor in appraisals and underwriting. Deals without external financing can close in weeks. Plan for the longer end. Due diligence surprises and lender delays aren't exceptions; they're the rule on first deals.
Common LOI Mistakes Buyers Make
- Leaving price vague. "approximately $X" or "subject to further discussion" signals you haven't done the work. Sellers take offers less seriously when the price isn't firm.
- No due diligence out. If you can't terminate during due diligence, you're committed to a deal before you've verified anything. Always include a due diligence termination right.
- Skipping earnout detail. Vague earnout language in the LOI becomes expensive litigation later. Define every metric, measurement period, and dispute resolution mechanism upfront.
- Ignoring the transition period. Assuming a 2-week handoff and getting a seller who disappears at closing is one of the most common post-acquisition problems. Lock in the transition period and duration before you sign.
- Not modeling the deal before the LOI. An LOI commits both parties to a structure. If that structure doesn't work financially — if the cash flow can't support the debt service — you find out at the 11th hour. Run the numbers in the AcquireCalc deal calculator before you submit the LOI.
Who Drafts the LOI?
Either party can draft it, but buyers who let the seller or broker send their template are starting from the wrong position — that document was written to protect the seller. Draft your own. It's a few pages, not a novel, and it frames every term in your favor from the start.
For deals under $500K, a clean LOI from a business attorney runs $500–$1,500. On larger deals, it's not optional. An attorney who's closed dozens of small business acquisitions will catch structural issues on page one that a first-time buyer won't spot until closing — if then.
Sources & Further Reading
- SBA: Buying an Existing Business — government guidance on the acquisition timeline and SBA loan process
- International Business Brokers Association (IBBA) — professional standards for business transaction documentation and deal structure