Letter of Intent to Purchase a Business: What an LOI Covers in a Business Sale and How Binding It Is

A letter of intent to purchase a business is a short written document, usually two to five pages, that sets out the price, structure and key terms a buyer and seller have agreed in principle before lawyers draft the purchase agreement. Most of an LOI is deliberately non-binding, but the exclusivity, confidentiality and expense clauses inside it usually are binding, and those are the clauses that can cost you real money.

The LOI is the moment a conversation becomes a deal. Everything before it is exploratory. Everything after it happens on the buyer's timetable, with your business off the market and your financials open on their desk. Sellers who understand what they are signing negotiate hard at this stage. Sellers who treat it as a formality find out three months later that the price in the LOI was the buyer's opening bid, not their final one.

What is a letter of intent in a business sale?

An LOI records the shape of the deal so both sides can commit real time and money to the next phase without discovering a fundamental disagreement halfway through. It states what is being bought, for how much, in what form, and under what conditions the buyer will proceed to closing.

It is not a contract to buy. The definitive purchase agreement does that job, and it typically runs 40 to 100 pages with schedules. The LOI's purpose is narrower: to prove that the price and structure are genuinely agreed, so nobody spends $30,000 on legal and accounting work only to learn that the buyer assumed an asset deal while the seller assumed a stock sale.

In the small and lower-middle market, an LOI usually arrives after the buyer has seen a confidential information memorandum, two or three years of financials, and has had at least one management meeting. By that point they have formed a view on your earnings. If your own view of those earnings is different, the LOI is where that difference surfaces, and it is far cheaper to argue about it now than during diligence.

Is a letter of intent legally binding?

Partly. A well-drafted LOI says explicitly which provisions bind the parties and which do not, and the split is fairly standard across US deals. The economic terms are non-binding. The procedural protections are binding.

The one drafting error worth checking for personally: an LOI that fails to state that the economic terms are non-binding. Courts in several states have found preliminary agreements enforceable where the language was ambiguous and the parties behaved as though a deal existed. The fix is one sentence, and any competent transaction attorney will insist on it. This is not a document to sign without counsel reading it, even though it looks informal.

What should a letter of intent to purchase a business include?

A useful LOI is specific enough to prevent a later argument and short enough that it does not become the purchase agreement. These are the components that show up in nearly every serious offer.

Working capital deserves more attention than it gets. A buyer expects to receive the business with enough receivables, inventory and cash to keep operating without an immediate injection. If the LOI says "delivered with normalized working capital" and nothing more, that phrase will be defined later by whoever pushes harder, and the swing can easily be six figures. Set the target in the LOI, state the measurement method, and state the true-up mechanism.

How long does a letter of intent last?

Most LOIs run 30 to 90 days, with 60 days being the common midpoint for a small business deal and 90 days typical where SBA financing is involved because lender timelines add weeks. The document should state an expiration date after which the offer lapses if no purchase agreement has been signed.

Push for the shorter end. A long exclusivity period costs you optionality and momentum, and if a deal is going to fall apart it usually shows the strain within the first month of diligence. Where a buyer genuinely needs more time, for example while an SBA 7(a) lender works through approval, tie the extension to a milestone rather than granting it up front: exclusivity extends by 30 days only if the lender has issued a term sheet by day 45.

What is exclusivity in an LOI and how long should it be?

Exclusivity, also called a no-shop, means you agree not to solicit, negotiate with, or provide information to any other potential buyer for a defined period. It is the single most valuable thing a buyer gets from an LOI, and it is why buyers are willing to put a price on paper before diligence.

From your side, exclusivity removes your leverage. The moment you sign it, competitive tension disappears and the only alternative to this buyer is starting over. That is precisely why some buyers write an attractive number in the LOI: it wins the exclusivity, and price can be revisited once the auction is dead.

Three protections are worth negotiating. Keep the period as short as is realistic. Add a termination right if the buyer materially changes the price or terms, so a reduction releases you immediately rather than trapping you until the clock runs out. And carve out your ability to respond to genuinely unsolicited inbound approaches, even if only to acknowledge them without negotiating.

What happens after the letter of intent is signed?

Diligence starts, and the volume of it surprises most first-time sellers. Expect a request list covering three to five years of financial statements and tax returns, monthly profit and loss detail, bank statements, an accounts receivable aging, customer concentration, supplier contracts, leases, licenses, employee census and pay, insurance, litigation history, and every add-back you claimed in the earnings you presented.

That last item is where deals get repriced. Every discretionary expense you added back to reach seller discretionary earnings will be tested against actual documentation. Add-backs you can evidence survive. Add-backs you cannot evidence come straight off the earnings figure, and because the price is a multiple of that figure, a $40,000 add-back you cannot support can remove well over $100,000 from your price at a 3x multiple.

The mechanics of assembling all this are worth planning for. Pulling three years of receivable detail and vendor history out of PDF statements and invoices into clean spreadsheets a buyer's accountant can work with is a grind, though you can now extract the invoice data automatically instead of retyping it. Sellers who have that package ready before signing the LOI move through diligence faster, and speed protects price because every extra week gives the buyer another chance to find something.

Running in parallel: the buyer's lawyers draft the purchase agreement, the lender underwrites, the landlord is approached about assigning the lease, and licenses are checked for transferability. Any one of these can become the item that delays closing. The documents needed to sell a business guide covers the full checklist.

Can a buyer lower the price after the LOI is signed?

Yes, and it happens often enough to have its own name: the retrade. Because the price in the LOI is non-binding, a buyer can come back during diligence and propose a lower number, and your leverage at that point is limited by the exclusivity you already granted.

Legitimate retrades exist. If diligence uncovers earnings that were overstated, a customer concentration you did not disclose, unrecorded liabilities, or a lease that cannot be assigned, the buyer has genuinely learned that the business is worth less than they thought. Opportunistic retrades exist too, arriving late in the process, based on vague concerns, timed for the moment the seller is emotionally and financially committed.

You can tell the difference by asking one question: what specific fact did you learn that you did not know when you signed the LOI, and how does it change the earnings? A real retrade produces a documented answer. An opportunistic one produces adjectives.

The defenses are all things you do before signing. Do your own quality-of-earnings work first so there are no surprises to find. Know your defensible number cold, from an EBITDA or SDE multiple cross-checked against a revenue multiple and a discounted cash flow, so you can tell whether a reduced offer is still fair. Keep exclusivity short. And write in the termination right that lets you walk the day the price moves.

Should you sign an LOI without a valuation?

No. Signing an exclusivity clause without knowing what the business is worth means agreeing to stop looking at alternatives before you know whether the offer in front of you is a good one.

The point of a valuation here is not to produce a number you show the buyer. It is to tell you three things you need before you sign: whether the offered price sits inside a defensible range for your earnings and industry, how much of the price is contingent rather than cash, and which of your value drivers a buyer is most likely to challenge during diligence. An offer of $2.1M means nothing in isolation. An offer of $2.1M against a defensible range of $2.4M to $2.9M means you have room to negotiate and a reason to.

Structure matters as much as headline price, and LOIs are frequently compared badly because sellers look only at the top number. A $2.4M offer with $1.5M cash at closing and $900,000 in an earnout is usually worth less than a $2.2M offer paid entirely in cash, because the earnout may never be collected. Convert every offer to cash at closing plus the risk-adjusted value of everything else before you rank them.

Letter of intent vs term sheet vs purchase agreement

In practice, US business brokers use "letter of intent" and buyers from a venture or private equity background sometimes say "term sheet" for the same document. The label does not change the legal analysis. What matters is which clauses are stated to be binding.

Next steps

Before you sign anything with an exclusivity clause in it, get a defensible range for the business on its own numbers. Enter revenue, normalized earnings and growth into the business valuation calculator and it runs a revenue multiple, an SDE or EBITDA multiple and a discounted cash flow together, benchmarks them against comparable sales, and shows which drivers are moving the range. That takes a few minutes and it changes how you read the offer.

If you are earlier in the process, how to prepare a business for sale covers the twelve months before an LOI ever arrives, and what multiple your business sells for explains where your number is likely to land. Sellers running the process themselves should also read how to sell a business without a broker, since without an intermediary you will be the one negotiating the LOI directly. For the full picture on the sale process, start at valuing a business for sale.