11 Sep What Is a Letter of Intent When Selling a Business?
After weeks or months of conversations with a potential buyer, the letter of intent, often called an LOI, is usually the first document that puts real terms on paper. It’s a meaningful milestone, but it’s also not the final word on your deal, and understanding the difference matters.
An LOI outlines the proposed terms of a transaction based on what both sides have discussed so far, before full due diligence and formal legal agreements are drafted. Think of it as a detailed handshake. It typically includes the proposed purchase price and how it will be structured, whether that’s cash, seller financing, an earnout, or some combination. It outlines whether the deal is structured as an asset sale or a stock sale. It lays out key conditions the buyer needs to satisfy, like financing or the results of due diligence. And it sets a proposed timeline for getting to closing.
Most of the economic terms in an LOI, including the price, the structure, and the conditions, are not legally binding. They’re a strong statement of intent, but they remain subject to what due diligence actually reveals. What usually is binding, though, are the confidentiality and exclusivity provisions. That exclusivity period, sometimes called a no shop clause, means you agree to stop negotiating with other potential buyers for a set period of time while this buyer completes their diligence.
That’s exactly why signing an LOI is a real commitment, even though the price isn’t locked in yet. Once you sign, you’re generally off the market for that exclusivity window, so it’s worth making sure you’re genuinely ready to move forward with this specific buyer before you sign anything.
A well written LOI also protects you from surprises later. If the purchase price adjustment methodology, like a working capital target, is clearly defined here rather than left vague, you’re far less likely to be blindsided by a lower number at closing. The same goes for the timeline and the conditions that could let a buyer walk away or push for a lower price later.
Before signing, it’s worth negotiating the length of the exclusivity period, getting the price and terms as specific as possible rather than leaving room for reinterpretation, and understanding exactly what conditions still need to be satisfied before this deal is truly final.
Once the LOI is signed, the real work of due diligence and drafting the definitive purchase agreement begins.
Related reading: What Happens After You Sign a Letter of Intent to Sell Your Business? and How Long Does It Take to Sell a Business? A Realistic Timeline
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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.