20 Jul What Happens After You Sign a Letter of Intent to Sell Your Business?
Signing a letter of intent is one of the most emotionally significant moments in a business sale. After months of preparation, marketing, and negotiation, you have a buyer who wants your business and has put their offer in writing. It can feel like the deal is essentially done.
It is not.
The letter of intent marks the beginning of the most critical and most risky phase of the entire transaction. Everything that happens between the LOI signing and closing day determines whether you actually receive the price you agreed to, under the terms you negotiated. Understanding what that process involves, where deals most commonly fall apart, and how to protect yourself is the difference between closing on your terms and walking away with less than you planned.
This guide walks through every stage of the post-LOI process in the order it happens. If you have not yet started the sale process and want to understand what your business is worth before you get to this stage, start with the free ExitOnTop Business Valuation Calculator.
What a Letter of Intent Actually Commits You To
A letter of intent, sometimes called a term sheet or memorandum of understanding, outlines the basic terms of a proposed transaction. It typically includes the purchase price, the deal structure (asset sale or stock sale), the earnout provisions if any, the anticipated timeline, and the conditions that must be met before closing.
Most letters of intent are non-binding on the substantive deal terms, meaning either party can still walk away without legal consequences if they are unable to reach a final agreement. However, most LOIs include two provisions that are binding: a confidentiality obligation and an exclusivity period.
The exclusivity period, sometimes called a no-shop clause, is the provision that deserves the most attention. During this period, typically thirty to ninety days, you are contractually prohibited from soliciting or entertaining offers from other buyers. You are committed to working exclusively with this buyer toward a closing. If the deal falls apart after the exclusivity period expires, you have to start over.
The Exclusivity Period: What It Means and Why It Matters
The exclusivity period exists to give the buyer time to complete their due diligence and arrange financing without the risk that the seller will simultaneously be negotiating with a competing buyer. From the buyer’s perspective, it makes sense. They are about to invest significant time and money in investigating your business, and they want assurance that the deal is theirs to lose.
From the seller’s perspective, the exclusivity period represents real risk. You have taken your business off the market. Other buyers who might have been interested will move on to other opportunities. If this buyer backs out two months into exclusivity, you are starting over in a market that has moved on.
For this reason, it is worth negotiating the exclusivity period carefully before signing the LOI. Push for the shortest exclusivity period that gives the buyer a realistic chance to complete their diligence. Sixty days is common. Ninety days is on the longer end for straightforward transactions. Anything beyond ninety days should come with meaningful justification from the buyer.
What Happens During Due Diligence After the LOI Is Signed
Due diligence is the formal investigation process during which the buyer and their advisors verify everything you have represented about your business. It typically begins within one to two weeks of the LOI signing and runs for thirty to sixty days in most small business transactions.
The buyer will send a due diligence request list, which is a comprehensive document requesting financial statements, tax returns, customer contracts, employee records, equipment documentation, lease agreements, compliance records, and any other material information about the business. The length and depth of this request depends on the buyer’s sophistication and the complexity of the business being acquired.
Your job during due diligence is to respond completely and promptly to every request. Incomplete or delayed responses signal disorganization and increase buyer anxiety. Every day a buyer waits for requested information is a day their concern about what they might find is growing.
Our detailed guide on what to expect during business sale due diligence covers what buyers are specifically looking for and how to prepare before they start asking.
Negotiating the Purchase Agreement: Where Deals Can Still Fall Apart
While due diligence is happening, the attorneys for both parties begin drafting and negotiating the purchase agreement. This document is the definitive legal contract for the transaction and is far more detailed than the letter of intent.
The purchase agreement covers the final purchase price and payment terms, the specific assets or shares being transferred, the representations and warranties each party is making, the indemnification provisions that determine who is responsible if something goes wrong after closing, any non-compete and transition agreements, and the conditions that must be met for closing to occur.
Representations and warranties are the section where deals most commonly get contentious after due diligence. A representation is a statement of fact that you are making about your business, and a warranty is your guarantee that the statement is true. If a representation turns out to be inaccurate after closing, the buyer has the right to seek indemnification, meaning they can come back to you for compensation.
Negotiating the scope and survival period of representations and warranties, and the indemnification caps and deductibles that limit your exposure, is one of the most important things you can do to protect yourself in the purchase agreement process. This is not an area to try to handle without experienced legal counsel.
Financing Contingencies and What Happens If Your Buyer’s Loan Falls Through
If your buyer is using SBA financing or another form of acquisition loan, the purchase agreement will include a financing contingency. This provision gives the buyer the right to terminate the deal without penalty if they are unable to secure the agreed upon financing.
SBA loan approval is not guaranteed even after an LOI is signed. The lender will conduct its own review of the business, order an independent business valuation, and evaluate whether the business generates sufficient cash flow to service the acquisition debt. If the lender’s appraisal comes in below the agreed purchase price, the loan amount may be reduced, requiring the buyer to come up with additional cash or renegotiate the price.
Understanding how SBA acquisition financing works from the seller’s perspective helps you anticipate and prepare for financing-related complications before they affect your closing timeline.
Working Capital Adjustments and Other Closing Surprises
One of the most common post-LOI surprises for sellers is the working capital adjustment. Most purchase agreements include a provision requiring the seller to deliver the business with a defined level of working capital, typically calculated as current assets minus current liabilities, at the time of closing.
The working capital target is usually based on the historical average working capital of the business. If the actual working capital at closing is below the target, the purchase price is reduced dollar for dollar. If it is above the target, the seller receives additional payment.
Sellers who are unaware of this provision sometimes inadvertently reduce their working capital in the weeks before closing by collecting receivables aggressively, deferring payables, or drawing down inventory. These actions, while natural from a cash management perspective, can trigger a working capital shortfall that reduces the final proceeds.
The closing statement will also include prorations for items like prepaid insurance, property taxes, utility deposits, and other items that span the closing date. Reviewing a draft closing statement before closing day with your attorney ensures there are no errors or unexpected deductions.
From Signed Purchase Agreement to Closing Day: The Final Stretch
After the purchase agreement is signed and all contingencies are satisfied, the parties move toward closing. The closing agent or escrow company coordinates the signature of final documents, the wire transfer of funds, and the formal transfer of ownership.
In most transactions, closing is handled remotely through document packages and wire transfers rather than everyone gathering in a room. The seller signs a large set of closing documents including the bill of sale, assignment agreements for transferred contracts, non-compete agreement, and any transition or consulting arrangements. The buyer’s lender wires the purchase funds to the escrow agent, who distributes them per the closing statement.
Most sellers feel a complex mix of relief and emotional weight on closing day. You receive the proceeds you have worked toward, and you formally end your role in a business you built. That transition, regardless of how well it goes financially, is worth preparing for emotionally as well as logistically.
How to Protect Your Deal From LOI to Closing
The sellers who close on their terms are consistently the ones who stayed engaged and organized throughout the post-LOI process. Here is what that looks like in practice.
Respond to every due diligence request promptly and completely. Designate a point person on your team to manage the data room and track outstanding items. Do not leave requests unanswered for more than a day or two without communicating a timeline.
Stay in close communication with your advisor throughout the process. Your advisor should be your primary contact with the buyer and their team, and they should be giving you regular updates on where things stand and what is coming next.
Do not make major business decisions or operational changes without consulting your advisor during the exclusivity period. Significant changes to the business, including adding or losing major customers, hiring or terminating key employees, or taking on new debt, can affect the deal and need to be disclosed.
Review the confidentiality agreement and all LOI provisions with your attorney before signing so you understand exactly what you have committed to and what protections you have if the buyer does not perform.
Know your number before you sign anything: https://exitontop.com/business-valuation-calculator/
Disclaimer: This content is for general educational purposes only and should not be considered financial, legal, or tax advice. Every business and situation is unique. Please consult a qualified advisor before making any decisions.