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A letter of intent to purchase a business is a short document in which a buyer sets out the price and main terms it proposes to pay for your company before anyone drafts the final contract. For a seller, it is the moment a conversation becomes a deal, and the terms you accept here shape almost everything that follows.
Most owners see only one or two of these letters in their lives, and they usually arrive from a buyer’s attorney written in the buyer’s favor. This guide explains what the letter covers, which parts bind you, how to read an offer line by line, what to push back on, and how to compare competing offers before you sign.
Key Takeaways
- An LOI summarizes the proposed price, structure and key conditions of a sale; the definitive purchase agreement comes later and controls.
- Most business terms in an LOI are non-binding, but confidentiality, exclusivity and a few other clauses usually do bind both sides.
- The headline price matters less than how and when you are paid: cash at closing, seller notes, earnouts, escrows and the working capital target all change what you keep.
- Exclusivity is the buyer’s biggest gain from the letter. Keep the period short and tie it to clear diligence milestones.
- Vague language now becomes a renegotiation later, so settle the terms that matter to you before you sign.
What Is a Letter of Intent in a Business Sale?
An LOI, sometimes called a term sheet or indication of interest once it is more formal, is the bridge between a verbal offer and a binding purchase agreement. The buyer has usually reviewed your summary financials, met you at least once and signed a non-disclosure agreement. The letter records what the buyer proposes to pay and on what conditions, so both sides can decide whether it is worth spending time and legal fees on full due diligence and contract drafting.
A well-built letter is typically three to eight pages. It does not try to answer every question. It names the parties, describes what is being sold, states the price and how it will be paid, lists the main conditions to closing and sets a timeline. The definitive agreement, which your attorney and the buyer’s attorney negotiate after diligence, turns those points into enforceable promises.
Where the LOI sits in the sale process
- Preparation, valuation and confidential marketing to qualified buyers
- Buyer calls, site visits and initial questions under an NDA
- Offers arrive; you negotiate and sign one LOI
- Confirmatory due diligence during an exclusivity period
- Negotiation and signing of the definitive purchase agreement
- Closing, funding and transition
If you are earlier in the journey, our guide to how long it takes to sell a business walks through each of these stages and where delays usually come from.
Is a Letter of Intent Binding?
Usually, partly. Most letters state that the price and deal terms are non-binding, meaning either side can walk away before the definitive agreement is signed without owing the other anything. A handful of provisions are written to bind both parties from the day of signing, because they protect the process itself.
Commonly binding provisions include:
- Confidentiality: the buyer cannot disclose or misuse what it learns about your company.
- Exclusivity or no-shop: you agree not to market the business or negotiate with other buyers for a set period.
- Expenses: each side pays its own advisors unless the letter says otherwise.
- Governing law and dispute venue: which state’s law applies to the binding clauses.
- Non-solicitation: the buyer will not recruit your employees or approach your customers if the deal fails.
Wording matters more than labels. Courts look at the language and the parties’ conduct to decide whether they intended to be bound. The best-known warning is the 1980s dispute over Getty Oil, in which a Texas jury awarded Pennzoil more than $10 billion against Texaco after finding that an agreement in principle had been enforceable. Your letter should say plainly which sections bind and that everything else depends on a signed definitive agreement.
What a Letter of Intent to Purchase a Business Should Include
Every buyer’s template is a little different, but a complete letter for a small or mid-sized company covers the terms below. The table shows what each term means for you as the seller and what to look for.
| LOI term | What it says | What sellers should check |
|---|---|---|
| Purchase price | Total enterprise value offered | Whether it assumes cash-free, debt-free and a normal level of working capital |
| Deal structure | Asset purchase or stock (equity) purchase | Tax effect on your net proceeds and which liabilities stay with you |
| Form of payment | Cash at closing, seller note, earnout, rollover equity | How much is guaranteed on closing day versus contingent or deferred |
| Working capital target | Level of receivables, inventory and payables delivered at closing | How the target was set and whether it reflects seasonal swings |
| Escrow or holdback | Portion of price held back to cover claims | Amount, duration and the conditions for release |
| Financing | How the buyer will fund the purchase | Proof of funds, lender status and whether financing is a closing condition |
| Due diligence | Scope and length of the buyer’s review | A defined list and timeline rather than open-ended access |
| Exclusivity | Period during which you cannot talk to other buyers | Length, extension rights and early termination triggers |
| Seller transition | Your role after closing | Duration, compensation and expected time commitment |
| Restrictive covenants | Non-compete and non-solicit terms for you | Geography, duration and how they fit state law |
| Conditions to closing | Events that must happen before closing | Landlord and key customer consents, licenses, financing |
| Target closing date | Expected timeline to close | Whether it is realistic given diligence and lender needs |
Price versus proceeds
Two letters with the same headline number can put very different amounts in your bank account. A price that includes a large seller note or an earnout is worth less on closing day than an all-cash offer, and a deal structured as an asset purchase may be taxed differently from a stock sale. Our guides to asset versus stock sales, seller financing and earnouts explain how each piece affects what you keep.
The working capital peg
Many owners overlook this clause, and it often moves real money at closing. The buyer expects to receive a business with enough receivables and inventory, net of payables, to run normally. If the working capital you deliver falls short of the agreed target, the price drops dollar for dollar; if it exceeds the target, you may be paid the difference. Ask the buyer how the target was calculated, and insist on a figure based on a trailing average rather than a single favorable month.
How to Evaluate an LOI as a Seller
Treat the first letter as an opening position, not a finished deal. Before you respond, work through each term against your own goals: the amount you need at closing, how long you want to stay involved, what happens to your staff and how much risk you are willing to carry after the sale.
Questions to ask about every offer
- How much of the price is paid in cash at closing, and how much is deferred or contingent?
- Who is the actual buyer entity, and can it show where the money is coming from?
- If a lender is involved, has the buyer been pre-qualified, and what will the lender require from you?
- What does the buyer plan to verify in diligence that it has not already seen?
- What specific events would let the buyer lower the price later?
- How long is exclusivity, and what happens if the buyer misses the timeline?
- What will your role, title and pay be during the transition?
A hypothetical comparison
The figures below are hypothetical and simplified to show the point. Suppose a service company receives two offers.
| Term | Offer A | Offer B |
|---|---|---|
| Headline price | $3,200,000 | $2,900,000 |
| Cash at closing | $2,000,000 | $2,610,000 |
| Seller note | $600,000 over 5 years | $290,000 over 3 years |
| Earnout | Up to $600,000 tied to revenue growth | None |
| Exclusivity | 120 days | 60 days |
| Financing | Subject to lender approval | Proof of funds provided |
Offer A looks larger, but nearly 40% of it depends on future performance and the buyer’s ability to pay over time, and the long exclusivity period takes you off the market while the buyer arranges funding. Offer B pays far more on day one and carries less risk. Many sellers would choose Offer B or use it to push the first buyer to raise the cash portion. The right answer depends on your tax position, your confidence in the business after you leave and how much you need at closing.
Terms Worth Negotiating Before You Sign
Your leverage is highest before you sign. Once exclusivity starts, you can no longer play buyers against each other, and every open point becomes harder to win. Focus your effort on the terms below.
- Shorter exclusivity: exclusivity periods in lower middle market deals commonly run from about 30 to 90 days. Ask for the shortest period that fits the buyer’s diligence, with an extension only if the buyer is on schedule.
- Defined diligence: ask for a written request list and a deadline, so diligence cannot drift for months.
- Price adjustment limits: state that the price changes only through the working capital mechanism, not because the buyer later wants a discount.
- Financing certainty: request proof of funds or a lender letter, and a date by which financing must be confirmed.
- Reasonable escrow: negotiate a smaller holdback and a shorter release period.
- Transition terms: pin down how long you will stay, how much you will be paid and what time commitment is expected.
A transaction attorney should review the letter before you sign, even though most of it is non-binding. Our article on the kind of lawyer you need to sell your business explains what to look for in that advisor.
Red Flags in a Buyer’s LOI
Some letters are written to lock up a business cheaply and renegotiate later. Watch for these warning signs:
- A high headline price with little detail on how it will be paid
- Long or open-ended exclusivity with no milestones
- Broad conditions such as satisfactory diligence in the buyer’s sole discretion
- No information on how the purchase will be financed
- A working capital target that is missing or labeled to be determined
- Requests for sensitive customer or employee data before a letter is even signed
None of these alone means the buyer is acting in bad faith, but each gives the buyer room to reopen the price after you have stopped talking to everyone else. The time to close those gaps is before signing.
What Happens After You Sign the LOI
Once both sides sign, the buyer begins confirmatory due diligence, reviewing your financial statements, tax returns, contracts, leases, licenses, employees and operations in detail. Your attorney and the buyer’s attorney start drafting the definitive purchase agreement in parallel. Lenders, if involved, complete their own underwriting.
This is where the quality of your preparation shows. Organized books and a clean data room keep diligence on schedule and give the buyer fewer reasons to revisit the price. A broker who manages the document flow and keeps both sides on the agreed timeline can make the difference between a deal that closes and one that stalls.
When to Talk to a Broker
The best time to bring in an advisor is before offers arrive, so you can create competition and set the terms of the conversation. SellerForce brokers have owned and operated businesses themselves, and they handle preparation for and management of due diligence and negotiation of all aspects of the transaction. If you already have a letter in hand, a broker can still help you compare it with what the market might offer.
- You have received an unsolicited offer and do not know whether the price is fair
- You are comparing two or more letters with different structures
- A buyer is pressing you to sign quickly or to agree to long exclusivity
- You want a current business valuation before you respond
Before you sign a letter of intent to purchase a business, make sure you know what your company is worth and which terms protect you. Request a free valuation and exit consultation with SellerForce, and bring any offer you have already received so we can review it with you.
