What Is a Letter of Intent (LOI)? A Guide for Business Sellers

You've been through the process — confidential marketing, buyer meetings, negotiations — and now a buyer has submitted a Letter of Intent to purchase your business. This is a major milestone. But what exactly is an LOI, what does it mean, and how should you evaluate it?

What Is a Letter of Intent?

A Letter of Intent (LOI) is a written document that outlines the proposed terms of a business acquisition. Think of it as a detailed handshake — it says "here's what we're proposing" before both parties invest the time and money into formal due diligence and legal documentation.

An LOI is sometimes called a term sheet or indication of interest (IOI), depending on how formal it is and at what stage of the process it's presented.

What's in a Typical LOI?

While every LOI is different, most include the following key terms:

Purchase Price

The total consideration the buyer is offering. This may include:

• Cash at closing — the amount you'll receive on day one
• Seller note — a portion of the price paid over time with interest
• Earnout — additional payments contingent on future business performance
• Equity rollover — retaining an ownership stake in the business post-sale (common with PE buyers)

Deal Structure

Asset sale vs. stock sale. This determines what's actually being purchased and has significant tax implications for both parties. In an asset sale, the buyer purchases specific business assets. In a stock sale, they purchase your ownership interest in the entity.

Due Diligence Period

The time the buyer has to investigate your business before committing to close. Typically 60 to 90 days, though it can be shorter or longer depending on business complexity.

Exclusivity Period

Also called a "no-shop" clause. This prevents you from negotiating with other buyers for a specified period (usually 60-120 days) while the buyer conducts due diligence. This is almost always binding.

Working Capital Requirements

The buyer will typically expect the business to have a "normal" level of working capital at closing. The LOI should define how working capital is calculated and what the target amount is. This is one of the most negotiated items in any deal.

Transition Terms

How long the seller will stay on after closing to help transition the business. Common terms range from 3 to 12 months, either as an employee or consultant.

Representations and Warranties

A general outline of the promises each party will make about the accuracy of information provided. The specifics get hammered out in the definitive purchase agreement.

Conditions to Close

What must happen for the deal to actually close — financing approval, landlord consent, key employee agreements, regulatory approvals, etc.

What's Binding and What's Not?

This is one of the most important things to understand about LOIs. Most LOIs are non-binding with respect to the actual purchase terms. The buyer is not legally obligated to complete the purchase at the stated price.

However, certain provisions are typically binding:

• Exclusivity/no-shop clause — you're committed to not talking to other buyers
• Confidentiality obligations — both parties must keep deal terms private
• Expense allocation — who pays for what during due diligence
• Governing law — which state's laws apply

The non-binding nature of the purchase terms means the buyer can still walk away or renegotiate after due diligence. This is why seller preparation and clean financials matter — surprises during due diligence are the most common reason deals fall apart or get repriced.

How to Evaluate an LOI

Not all LOIs are created equal. Here's what to look for:

Total Consideration vs. Cash at Close

A $5M offer sounds great — until you realize $2M is an earnout, $1M is a seller note, and you're only getting $2M in cash at closing. Always evaluate the certainty and timing of each component.

Earnout Terms

If there's an earnout, scrutinize the terms:

• What metrics trigger the earnout payments? (Revenue? EBITDA? Customer retention?)
• Who controls the business decisions that affect those metrics post-close?
• What's the earnout period?
• What happens in a dispute about metric calculations?

Earnouts can be valuable, but they can also be structured in ways that make them nearly impossible to achieve.

Closing Certainty

A slightly lower offer from a buyer with financing already secured and a clean track record of closing deals may be worth more than a higher offer from a buyer who still needs to secure financing.

Consider:

• Does the buyer have financing committed or do they still need to arrange it?
• What's the buyer's track record of closing deals?
• How many conditions to close are there?
• Is the due diligence timeline realistic?

Working Capital Provisions

Pay close attention to how working capital is defined and calculated. Disagreements about working capital adjustments are one of the most common sources of post-closing disputes. Make sure the definition is clear and the target is reasonable.

Non-Compete Terms

Most deals include a non-compete agreement for the seller. Review the duration, geographic scope, and industry scope carefully. A reasonable non-compete is standard — an overly broad one can limit your future opportunities.

What Happens After You Sign an LOI?

Signing an LOI kicks off several parallel workstreams:

1. Due diligence — The buyer (and their advisors) will request extensive documentation and access to your business. Financial records, contracts, employee information, customer data, legal matters, and more.

1. Definitive agreement drafting — Lawyers on both sides begin negotiating the actual purchase agreement, which contains all the detailed legal terms.

1. Financing finalization — If the buyer is using debt financing (bank loans, SBA loans), they'll work to finalize their commitment.

1. Third-party approvals — Landlord consents, key customer or vendor notifications, regulatory approvals as needed.

1. Transition planning — Both parties begin planning for the post-close transition.

Tips for Sellers

Don't sign the first LOI you receive without evaluating it carefully. Even in a single-bidder situation, there's room to negotiate key terms.

Hire an M&A attorney. Not your regular business attorney — someone who specifically handles business acquisitions. LOI terms set the framework for the entire deal.

Understand the tax implications. Asset sale vs. stock sale, earnout treatment, installment sale benefits — these decisions have major tax consequences. Involve your CPA early.

Keep running your business. The worst thing you can do after signing an LOI is take your foot off the gas. Declining performance during due diligence is a deal-killer.

Have your broker negotiate. If you're working with an M&A advisor, let them handle the negotiation. They know what's market, what's reasonable, and how to push back without blowing up the deal.

Need Help Evaluating an Offer?

If you've received an LOI — or you're preparing your business so you can attract strong offers — I can help. I work with business owners to navigate every stage of the M&A process, from preparation through close.

Book a confidential call to discuss your situation.