Writing a Letter of Intent (LOI): The Business Buyer's Guide

I think the letter of intent is the single most underestimated document in a business acquisition, and the irony is that it's also the document that defines the entire deal. Everything downstream — the purchase agreement, the SBA (Small Business Administration — the federal agency that guarantees small business loans) application, the closing documents, the seller's expectations, your lender's analysis — traces back to what's in that two-to-five-page letter you signed before anybody started doing real work.

If the LOI (Letter of Intent — a preliminary agreement that outlines deal terms before the binding contract) is vague or missing critical terms, you're going to feel it at every stage of the transaction.

I review LOIs constantly. It's one of the first things I look at when a borrower brings me a deal, and I can usually tell within the first page whether the transaction is going to close cleanly or whether we're heading for three rounds of renegotiation.

So what I want to do here is walk you through what an LOI actually is, what it should contain, what the binding and non-binding provisions mean in practice, and — along those lines — what mistakes I see buyers make that cost them time, money, and leverage.

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What an LOI Is (And What It Isn't)

A letter of intent is a written expression of a buyer's intention to purchase a business under specified terms. It's the handshake before the handshake — a preliminary agreement that outlines the major deal points and establishes a framework for negotiation.

Here's what it's not: a purchase agreement. Most of its provisions are non-binding, meaning either party can walk away without legal liability if the deal doesn't come together. The LOI says "here's what we're proposing." The purchase agreement says "here's what we agreed to, with legal obligations."

So what does that mean practically? The LOI is your opportunity to establish the negotiating framework before lawyers start billing $400 an hour to argue over paragraph 7(b). I've seen LOIs that were so well-drafted they made the purchase agreement almost a formality. I've also seen LOIs so poorly done that the parties spent eight weeks re-litigating terms they thought were settled.

If you're still figuring out how to find the right business to buy, our guide on business brokers vs. direct search covers the sourcing side before you get to the LOI stage.

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Binding vs. Non-Binding Provisions

This is the part that trips up first-time buyers. In plain English: binding means legally enforceable — you can be held to it. Non-binding means either side can still walk away without legal consequences.

The majority of the LOI is non-binding — purchase price, deal structure, timeline, asset allocation — all subject to change during due diligence (the investigation period where you dig into every detail of the business). Neither party is legally committed to those terms simply by signing.

But certain provisions absolutely should be binding:

Exclusivity (No-Shop Clause). In plain English: the seller agrees not to entertain other offers while you're doing your homework. Arguably the most important binding provision. The seller commits not to market the business or negotiate with other buyers for a specified period — usually 60 to 120 days. Without this, you're investing in due diligence while the seller shops your offer. That sort of thing creates a dynamic where you're negotiating against yourself.

Confidentiality. Both parties keep the deal terms and due diligence information confidential. Employees, customers, and vendors shouldn't learn about a pending sale through gossip.

Earnest Money Deposit. Think of earnest money as a deposit that shows you're serious — usually refundable if the deal falls through for legitimate reasons. The LOI should specify how much, where it's held, and under what conditions it's refundable. Most deposits are refundable if the deal fails due to financing contingencies or material due diligence findings.

Governing Law and Dispute Resolution. Which state's law applies, and how disputes over binding provisions get resolved. This gets overlooked until someone needs it.

I think the key thing to understand is that non-binding doesn't mean meaningless. If you sign at a $900,000 purchase price and come back offering $650,000 with no supporting data, you haven't technically violated anything — but you've probably destroyed the seller's trust. The non-binding terms are your word, and your word matters.

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Key Terms Every LOI Should Include

If any of these are missing, I'm going to ask questions, because the absence of a term doesn't mean the issue doesn't exist — it means nobody addressed it yet, and it's going to surface later at a worse time.

Purchase Price and Payment Structure. The total price and general financing structure. SBA-financed? Seller note? Buyer equity injection (your personal cash investment into the deal)? The LOI doesn't need exact loan terms, but it should clearly state the economics.

Asset Sale vs. Stock Sale. This affects tax liability, contract assumptions, and inherited liabilities. In most SBA transactions, asset sales are preferred. If the LOI doesn't specify, the buyer and seller may have completely different assumptions — and that misalignment becomes expensive during purchase agreement drafting.

Due Diligence Period. Standard periods range from 30 to 90 days. SBA underwriting (the lender's behind-the-scenes process of analyzing your deal to decide whether to approve it) runs in parallel with due diligence, and if the period is too short, you may not have your lender's answer before time runs out.

Contingencies. The conditions that must be met before closing:

• Financing contingency — non-negotiable for SBA deals
• Landlord approval — I've seen deals die because the landlord wouldn't cooperate
• Key employee retention — if the business depends on specific people
• Material adverse change — protection if something significant negatively changes about the business or your finances since the deal was agreed to

Transition and Training Period. How long the seller stays post-closing and in what capacity. I typically like to see 30 to 90 days for straightforward acquisitions. A seller who walks away on day one leaves the buyer with no institutional knowledge. A seller who insists on staying twelve months may be signaling the business can't function without them — which raises questions the lender will ask.

For detail on what happens after the LOI moves toward closing, our closing process guide walks through the full timeline.

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Common LOI Mistakes

Certain patterns come up repeatedly. These aren't catastrophic individually, but they compound as the deal progresses.

Vague asset allocation. "$800,000 for the business" with no breakdown between tangible assets, inventory, and goodwill. This matters for taxes and for the lender's collateral (assets the lender can claim if the loan isn't repaid) analysis.

No exclusivity period. The buyer starts spending money on due diligence and discovers the seller is still showing the business to other buyers. Without a binding no-shop clause, every dollar you've spent is at risk.

Unrealistic timelines. "Closing within 30 days" for an SBA-financed acquisition is not realistic. Plan for 60 to 90 days minimum.

Missing financing contingency. I've seen LOIs drafted without attorneys that don't include this. If the SBA loan doesn't come through, the buyer may forfeit their deposit. That sort of thing is entirely avoidable.

No mention of seller cooperation. If the LOI doesn't address the seller's obligation to provide records and access during due diligence, the buyer has no recourse when the seller drags their feet.

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How the LOI Connects to SBA Underwriting

I think this is the piece most buyers don't consider, and it's where having an experienced lender or SBA originator in the conversation early makes a real difference.

The lender reads your LOI as a structural blueprint for the transaction they're financing. They're asking: Is the purchase price reasonable relative to earnings? Does the LOI mention equity injection? Is the seller note on standby (meaning the seller agrees to wait — no payments from you for a set period)? Is the transition period realistic?

Along those lines, I always recommend that buyers talk to their SBA lender before finalizing the LOI — not for pre-approval, but to make sure the terms don't create structural problems that make the deal unfinanceable. It's much easier to adjust the LOI than to restructure a deal already in underwriting.

For a full view of how deals get structured from LOI through closing, our SBA Deal Structuring Guide covers the mechanics end to end.

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When to Involve an Attorney

Before you sign. Not after. Not during. Before.

An attorney who understands business acquisitions will catch issues you won't see — ambiguous language, missing provisions, binding terms more restrictive than you intended. An hour or two of review is a few hundred dollars that could save tens of thousands downstream.

The seller likely has their own attorney or broker involved. If you're negotiating without professional guidance and they're negotiating with it, you're at a structural disadvantage. That's what spotting issues means in practice — you're looking at a transaction at the very beginning, trying to find all of those things that could become problems later, and addressing them while the terms are still flexible.

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Frequently Asked Questions

Is an LOI legally binding?

Mostly no, with important exceptions. General deal terms are typically non-binding. Specific provisions — exclusivity, confidentiality, earnest money, dispute resolution — should be binding. The LOI itself should explicitly state which is which.

How long should the exclusivity period be?

For SBA-financed acquisitions, 90 to 120 days at minimum. SBA underwriting takes time, and you don't want to race the exclusivity clock while waiting for lender decisions.

Should I use a template or hire an attorney?

Both. Start with a template to cover standard provisions, but have an attorney review before sending to the seller. Templates miss deal-specific nuances — industry contingencies, state law requirements, structural considerations that a generic form won't address.

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Free Resources for LOI Preparation

• SBA Business Plan Guide — Free templates to help you structure the business plan that supports your LOI and loan application
• SCORE: Find a Free Mentor — SCORE mentors include former business owners and attorneys who can review your LOI approach before you engage a paid attorney
• SBA Lender Match — Talk to a lender before finalizing your LOI. This free tool matches you with SBA lenders who can flag structural issues early

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This content is for educational purposes only and does not constitute legal, financial, or investment advice. We strongly recommend consulting with a qualified attorney, CPA, and financial advisor before making any business acquisition decisions.

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