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 — is the document that converts exploratory conversations into a committed negotiation. It's the bridge between "I'm interested in buying your business" and the formal purchase agreement. Getting the LOI right sets the tone for everything that follows; getting it wrong means either losing the deal or inheriting terms you can't unwind.
What an LOI Is (and What It Isn't)
An LOI is mostly non-binding. The buyer and seller agree in principle on price, structure, and key terms, but neither party is legally obligated to close the deal. The LOI signals serious intent and creates a framework — it doesn't create an enforceable obligation to buy or sell.
The exception: a few provisions in an LOI are typically made legally binding, and these matter enormously:
- 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. If the deal is an asset purchase or stock purchase, specify it here. Leaving structure ambiguous in the LOI creates conflict later — sellers assume stock (for tax reasons), buyers assume assets (for liability reasons).
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 acquisition. The LOI should give you the right to terminate for any reason during this window (called a "due diligence out"). Without this, you can be contractually committed to a deal before you've verified the financials.
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 negotiate with other buyers for a defined period — usually 30 to 90 days. This is the buyer's most valuable protection in an LOI: it prevents the seller from using your offer to extract a higher bid from another buyer while you're spending money on due diligence and legal fees.
Sellers sometimes push back on exclusivity (or want a shorter window) for exactly this reason — they want to keep their options open. The compromise: tie exclusivity duration to your due diligence needs. If you need 60 days to complete due diligence and get SBA approval, ask for 75 days. Pads for the inevitable.
A seller who refuses any exclusivity at all is a yellow flag: it means they're planning to run a parallel process while you spend money verifying the deal. Walk carefully or walk away.
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. Deals without external financing can close faster. Budget for it to take longer than you expect — surprises in due diligence and lender delays are the norm, not the exception.
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. Buyers usually prefer to draft their own LOI because it frames all the terms in their favor. If a seller or broker sends you their LOI template, read it carefully — it was written to protect the seller, not you.
For deals under $500K, a straightforward LOI from a business attorney costs $500–$1,500. For larger deals, it's worth the investment. An attorney who has done dozens of small business acquisitions will catch issues you won't see on a first deal.
Related Guides
- Asset purchase vs stock purchase — decide the deal structure before the LOI
- Due diligence checklist — what to verify once the LOI is signed
- Earnout agreements explained — model performance-based terms correctly
- Seller financing explained — structure the note before committing to terms
- How to value a small business — know your number before submitting an offer
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