If you are buying or selling a small business, the Letter of Intent is one of the most important documents you will sign. It is not the final contract, but it sets the foundation for everything that follows: the price, the structure, the timeline, and the negotiating leverage for both sides.
Most first-time buyers and sellers treat the LOI as a formality. That is a mistake. What you agree to in the LOI shapes the entire deal. This guide explains exactly what an LOI is, what it includes, and what to watch out for before you sign.
What Is a Letter of Intent?
A Letter of Intent, often called an LOI, is a written document that outlines the proposed terms of a business sale before the final purchase agreement is drafted. It signals that both the buyer and seller are serious and want to move forward together. It is signed after initial negotiations but before formal due diligence begins.
Most LOIs are non-binding on the deal terms, meaning either party can walk away if due diligence reveals problems or negotiations break down. However, certain provisions of an LOI are binding and enforceable: typically the exclusivity clause, confidentiality obligations, and cost-allocation terms.
Think of the LOI as a handshake agreement in writing. It does not close the deal, but it says: we agree on the basic terms, we are committed to working this out, and we are moving forward together in good faith.
What Does an LOI Include?
Purchase Price
This is the headline number. The LOI states how much the buyer is offering to pay. It may be expressed as a fixed amount, a range, or tied to a valuation formula. If the deal involves seller financing or an earn-out, the LOI should spell out those components separately so both sides are clear on what they are agreeing to.
Deal Structure
The LOI should specify whether the deal is structured as an asset sale or a stock sale. In an asset sale, the buyer purchases specific assets and liabilities. In a stock sale, the buyer purchases the owner’s equity interest. Most small business deals are asset sales. The structure has major tax implications for both sides, so your CPA should weigh in before you sign.
Deposit or Good Faith Payment
Some LOIs require the buyer to put down a good faith deposit, typically 1 to 5 percent of the purchase price. This deposit is usually held in escrow and credited toward the final purchase price at closing. It shows the seller the buyer is serious and provides some compensation if the buyer walks away without cause.
Exclusivity Period
This is one of the most important clauses and one of the most overlooked. Exclusivity means the seller agrees to stop marketing the business and stop talking to other buyers for a set period, usually 30 to 90 days. This gives the buyer time to complete due diligence without competition.
For sellers, a long exclusivity period is a real concession. If the buyer backs out after 90 days, the seller has lost months of marketing time and momentum. Sellers should push for a shorter exclusivity window and make sure it is tied to measurable milestones, not just calendar time.
Due Diligence Timeline
The LOI defines how long the buyer has to complete due diligence. Thirty to sixty days is typical for small business deals. This timeline matters because it sets the clock on exclusivity and gives both sides a shared expectation for the pace of the deal.
Contingencies
Buyers typically include contingencies that allow them to renegotiate or exit if certain conditions are not met. Common contingencies include financing approval, satisfactory completion of due diligence, lease assignment approval, and transfer of key contracts or licenses.
Sellers should review contingencies carefully. Broad or vague contingencies give buyers easy outs and can tie up the deal for months. If you are selling, push to keep contingencies specific and time-bound.
Seller Transition Period
Most LOIs address how long the seller will stay on after closing to help with the transition. Two weeks to six months is typical. If the buyer is relying heavily on the seller’s relationships or knowledge, this should be spelled out: duration, compensation, and scope of the seller’s role during the transition.
Confidentiality
A standalone NDA often precedes the LOI, but the LOI itself should restate that both parties will keep deal terms confidential. This protects sellers from having sensitive financial information spread among employees, customers, or competitors.
LOI vs Purchase Agreement: What’s the Difference?
The LOI is a roadmap. The purchase agreement is the legally binding contract. After the LOI is signed and due diligence is complete, attorneys for both sides draft the purchase agreement. This document runs 20 to 60 pages and covers every detail: representations and warranties, indemnification, closing conditions, escrow terms, and post-closing obligations.
The LOI does not lock in every term. Deals often get renegotiated after due diligence turns up surprises. But a well-written LOI narrows the negotiating range and reduces the chance of major surprises at the purchase agreement stage.
Common LOI Mistakes
Signing without legal review. An LOI looks simple, but the exclusivity clause and deposit terms are binding. Always have an attorney review before signing.
Agreeing to too long an exclusivity window as a seller. Sixty to ninety days is often reasonable, but anything beyond that gives the buyer too much control of your timeline.
Vague price terms. If the LOI says the price is subject to a working capital adjustment or a quality of earnings review, make sure you understand what that means. These adjustments can reduce the effective purchase price by 10 to 20 percent.
Not addressing the earn-out structure up front. If part of the price is contingent on future performance, the earn-out mechanics need to be clear in the LOI, not left for the purchase agreement. Earn-outs that are vague at the LOI stage almost always cause disputes later.
How LOIs Fit Into the Bigger M&A Process
The LOI is just one step in the deal. Before it comes the initial search, conversations, and valuation. After it comes due diligence, the purchase agreement, financing, and closing. To understand the full picture, read our M&A for Small Business: The Complete Guide.
Before you get to the LOI stage, you need to know what you are worth. Review How to Value a Small Business to make sure your valuation expectations are grounded before you start negotiating price. You should also understand EBITDA multiples by industry to see where comparable deals are pricing.
The International Business Brokers Association (IBBA) offers resources on LOI best practices and deal standards that are worth reviewing if you want to go deeper on the professional standards in this space.
Bottom Line
The LOI is not just a formality. It sets the tone for every negotiation that follows. Read it carefully, have an attorney review it, and do not sign anything you do not fully understand. The deals that close smoothly are almost always the ones where the LOI was clear and well-negotiated from the start.
Get access to more deal-making resources and guides at Hustler’s Library. Free membership, no fluff.
Ready to Know Where You Stand?
The Business Journey dashboard maps your exact position across all 13 stages. Track your progress, unlock resources for each step, and build with a framework used by thousands of founders at Hustler's Library.
No credit card required · Takes 3 minutes · Personalized to your stage
