The letter of intent for buying a business

A letter of intent is a mostly non-binding agreement on the price, structure, financing, and process of a business purchase, signed before the purchase agreement so that the expensive document has a shape to follow.

What is a letter of intent?

A letter of intent is the short document a buyer and seller sign before the purchase agreement, stating the price, the structure, and the process they intend to follow. Most of it is not binding: the price and terms are an expression of intent, and either side can walk away. Some of it is binding, usually the exclusivity period, the confidentiality terms, and who pays which costs if the deal does not close.

The LOI matters more than its length suggests, because it is the last document written before anyone has paid a lawyer. Every term left out of it becomes a negotiation later, conducted between attorneys at hourly rates, with both sides already committed. The buying guide places the LOI at the end of valuation and the start of diligence, which is exactly where the structure has to be settled.

What belongs in the LOI?

The 9 things a purchase agreement will need and the seller should not be surprised by:

1. The price, and what it includes. Working capital, inventory, equipment, real estate, and cash are each in, out, or priced separately, and the LOI says which.
2. The structure. Asset purchase or stock purchase, which decides what liabilities transfer and how the seller is taxed.
3. The financing. How much is buyer cash, how much is a senior loan, how much is a seller note, and whether the closing is conditional on the loan being approved.
4. The seller note terms. Amount, rate, term, and, if a senior lender is involved, the standby or subordination language. If the note is to count toward an SBA equity injection, the full standby terms go here and nowhere later.
5. Working capital. A target amount to be delivered at closing and how a shortfall or excess adjusts the price.
6. Due diligence. The period, the access the seller grants, and the buyer's right to walk away on what it finds.
7. The seller's transition. How long the seller stays, what they do, and what they are paid for it.
8. Non-compete and non-solicit. Duration and geography.
9. Exclusivity. The period during which the seller agrees not to negotiate with anyone else, which is the buyer's protection for the money diligence costs.

Why write the financing structure into the LOI?

Because the seller's expectations are set the day the LOI is signed. A seller who signs an LOI that says the note pays monthly, and is asked at closing to sign a standby agreement that pays nothing for the life of a senior loan, has every reason to refuse and usually does. Financed deals die at closing far more often from a structure introduced late than from a lender saying no.

The sentence to include is plain. The seller note will be subject to a standby agreement in the form the senior lender requires, with no payments to the seller until the senior loan is repaid, and the price reflects that. A seller who cannot accept the sentence in the LOI would not have accepted it at closing, and learning that before diligence costs nothing.

What should the LOI leave out?

Representations and warranties, indemnities, and the detailed mechanics of the closing, which belong in the purchase agreement where lawyers can draft them properly. An LOI that tries to be a purchase agreement takes weeks to negotiate and is then negotiated again. The purpose of the document is to agree the shape of the deal in a few pages so that the expensive document has a shape to follow.

How binding is it?

As binding as it says. The convention is that the commercial terms are non-binding and the process terms are binding, and the LOI should say so in plain words rather than leaving it to be argued. A buyer should assume the seller will hold them to the price in the LOI in spirit, whatever the document says: an LOI price that drops in diligence without a documented reason is a reputation problem with the seller and the broker, and with the next seller the broker introduces.

Diligence findings are the documented reason. The LOI's diligence clause is what lets the buyer come back with a lower price when the earnings rebuild does not support the seller's number, and the due diligence checklist is how the findings are recorded so the conversation is about documents rather than opinions.

What does the seller's LOI look like?

Often a broker's template with the price filled in and the structure left vague, because vagueness favours the seller. A buyer should send their own draft, or mark up the broker's until every one of the 9 items above is answered. The walkthrough PDF on this page is that markup, item by item, with the questions to ask before each blank is filled.

What happens after signing?

Diligence starts, the clock on exclusivity starts, and the lender receives the LOI as the first document in the package. The 7(a) readiness checklist lists what the lender needs next. A well-written LOI is the document that makes the rest of the process a matter of confirming what was agreed rather than discovering what was not.