Letter of Intent to Buy a Business

What the LOI is for

An LOI does three jobs. It aligns both sides on the economics before anyone pays a lawyer to draft a fifty-page agreement. It buys the buyer a period of exclusivity so diligence spend is not wasted competing against other offers. And it creates a written reference point — when a term is disputed in the purchase agreement, the LOI is what both attorneys look at first.

What it is not is a commitment to buy. Almost all of an LOI is expressly non-binding, and that is intentional: you have not verified the seller's numbers yet. The document should say so in plain language, and it should be equally plain about the handful of provisions that are binding.

The terms that belong in every buyer LOI

• Purchase price — and the assumptions behind it. A bare number is not a term. State what the price assumes: which earnings figure it is based on, that it is on a cash-free, debt-free basis, and that it assumes a normal level of working capital delivered at closing. A price of the same dollar amount can differ by tens of thousands depending on those assumptions.
• Structure. Asset purchase or equity purchase. Say it here. Discovering at the purchase-agreement stage that the seller assumed a stock sale for tax reasons is a common and entirely avoidable blowup — see asset purchase vs stock purchase for why each side cares.
• What is included and excluded. Equipment, vehicles, inventory at what valuation, the customer list, intellectual property, the domain and social accounts, and the phone number. On the exclusion side: cash, accounts receivable, the owner's personal vehicle, and any related-party real estate, which is usually a separate transaction or a lease.
• How the price is paid. Cash at closing, the size and terms of any seller note, any earnout, and any holdback or escrow. If your financing depends on a seller note on standby, that has to be in the LOI — asking for it later reads as a retrade.
• Financing contingency. State that closing is conditioned on acquisition financing on terms acceptable to you. Without it, a lender's decline leaves you arguing about your deposit.
• Diligence scope and access. A defined period, plus the specific right to speak with the accountant, review tax returns and bank statements, inspect the premises and equipment, and — on a schedule you both agree — meet key employees and, where appropriate, top customers.
• Exclusivity. The seller agrees not to market the business or negotiate with other buyers for a defined window. This clause is binding and it is the main thing you are buying with the LOI.
• Seller transition and non-compete. How many weeks of training, paid or unpaid, full or part time, and the length and geographic scope of the non-compete. Negotiating a non-compete after the seller has already agreed to a price is much harder than including it from the start.
• Employment of key people. If the business depends on a manager or a licensed technician, say that closing is conditioned on that person signing an offer or agreeing to stay.
• Target closing date and expense allocation. Each side bears its own costs, and the timeline is realistic for your financing — SBA-backed deals rarely close in under 60 days.

Binding versus non-binding — get this explicit

The standard construction is a document that states clearly that it does not create an obligation to complete the transaction, followed by a short list of provisions that survive as binding commitments. Those are almost always:

• Confidentiality — often incorporating an NDA you already signed.
• Exclusivity / no-shop — the seller's commitment not to entertain other buyers during the window.
• Expenses — who pays for what if the deal dies.
• Governing law and dispute resolution.

Two cautions. First, courts look at conduct and language, not the title of the document — an LOI that reads like a contract and lacks a clear non-binding statement can create more obligation than the buyer intended. Second, do not casually agree to a break fee or a non-refundable deposit at LOI stage. You have verified nothing yet; that is precisely the point of the diligence period that follows.

How long should exclusivity run?

Long enough to finish diligence and get a financing decision, short enough that the seller will agree. For a cash or conventionally financed deal on a clean small business, 30 to 45 days is common. If you are using SBA financing, that window is too short — underwriting plus a third-party valuation regularly runs six weeks on its own, so 60 to 90 days is the realistic ask, and it is reasonable to structure it as an initial period with a single extension if diligence is progressing in good faith.

Sellers resist long exclusivity because it takes the business off the market. The productive trade is a firm, milestone-based schedule: your document request goes out within days of signing, the seller commits to producing it within a stated number of business days, and the exclusivity clock is tied to their delivery. That protects you from a seller who slow-walks records until your window expires, and it gives them a genuine reason to say yes.

The terms buyers most often forget

• The working capital peg. If the LOI does not say the business will be delivered with a normal level of working capital, a seller can legitimately drain receivables and run down inventory before closing. This single omission is worth more than most price negotiations — the mechanics are covered in our purchase agreement guide.
• Inventory valuation method. At cost, and counted jointly near closing — not at the seller's retail estimate, and not including goods that have not moved in two years.
• Landlord consent as a condition. An assumable lease at known terms for at least the length of your loan. Lease assignment is one of the most common late-stage deal killers.
• Access to the accountant. Written permission to speak directly with the seller's bookkeeper or CPA saves weeks of relayed questions.
• Treatment of customer deposits and prepaid work. Money already collected for work not yet performed is a real liability that should reduce the price or be handled at closing.
• Escrow or holdback. A portion of the price held for a defined period against undisclosed liabilities. Far easier to introduce at LOI stage than to bolt on later.

After the LOI is signed

Signing the LOI starts the clock, and the first week matters most. Send the full document request immediately, get your lender the package the same week so underwriting runs in parallel rather than after diligence, and schedule the site visit early enough that anything you find can still change the price. If the numbers hold, the purchase agreement takes the LOI's economics and adds the legal machinery. If they do not hold, the LOI is exactly where a renegotiation is supposed to happen — that is what the non-binding language is for.

One practical note on tone: an LOI written as a list of demands invites a defensive response, and small-business sellers are frequently selling the thing they built. The terms above are all standard and defensible. Present them as the normal shape of a deal, because they are, and you will get more of them.

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