Most sellers reading their first LOI have the same questions. What exactly has this buyer offered? Is my confidential information protected once I sign? Am I locking myself out of other buyers? Could I be agreeing to something I don't fully understand?
This article walks through what an LOI actually is, what it typically covers, which parts might be legally binding, what to push back on before you sign, and what comes next once you do.
Key Takeaways
- An LOI lays out the buyer's proposed price, deal structure, major conditions, and timeline toward a definitive agreement.
- Confidentiality, exclusivity, and expense provisions are often binding even when the purchase terms aren't.
- Headline price means little without knowing payment terms, liabilities, and working capital adjustments.
- Review the LOI with a broker and transaction attorney before signing — not after.
What a Letter of Intent Means in a Business Sale
A letter of intent for selling a business is a written document, usually drafted by or for the prospective buyer, that records both parties' preliminary understanding of a proposed deal. It's not a contract to sell the business. It's a snapshot of where negotiations currently stand.
The LOI typically shows up after initial conversations, basic buyer qualification, and a signed confidentiality agreement. Full due diligence and the definitive purchase agreement still come later.
Why it matters to each side:
- Buyers get a framework to evaluate the business before spending serious time and money on a final agreement
- Sellers test whether the proposed price and structure are worth pursuing before opening the books
- Both sides lock in a shared view of price, structure, and timeline before diligence deepens
The LOI works as the deal roadmap. It sets diligence expectations, outlines how the purchase agreement will be drafted, flags financing or approval steps, and points to a target closing date.
How an LOI Differs From Other Deal Documents
Sellers sometimes confuse an LOI with other paperwork that shows up during a sale. They're related, but not interchangeable:
| Document | What It Does |
|---|---|
| Indication of interest (IOI) | A lighter, earlier expression of buyer interest with fewer specifics than an LOI |
| Letter of intent (LOI) | Lays out material proposed terms — price, structure, timeline — before definitive documents are drafted |
| Term sheet | Often used as another name for the LOI in business-sale transactions |
| Asset purchase agreement | The definitive document when a buyer acquires specific assets and assumed liabilities |
| Stock purchase agreement | The definitive document when a buyer acquires ownership shares, including the entity's existing liabilities |
Example: An HVAC owner doing $3 million in revenue draws interest from a strategic buyer. Early talks stay vague: general fit and a rough price range.
The LOI turns that into a real proposal—a specific price, asset vs. stock structure, and what happens to service contracts and technicians.
What Does an LOI Typically Include?
A well-drafted LOI locks in the major economic and structural points of the deal. Detailed legal language—representations, warranties, and indemnification mechanics—belongs in the definitive purchase agreement.
Core deal terms to look for:
- Buyer and seller identity, plus what is being acquired (business, assets, or equity)
- Proposed purchase price, including payment form and timing
- Transaction structure: asset purchase, stock purchase, or membership-interest purchase
- Assets included or excluded, and liabilities assumed versus retained
- Financing expectations, deposits, seller financing, earn-outs, and working-capital adjustments
Process and protection terms:
- Due diligence scope and the information the buyer can access
- Confidentiality obligations
- Exclusivity or "no-shop" restrictions
- Who pays transaction expenses
- A proposed closing timeline
Terms that can materially affect you as the seller:
- Closing conditions, including any required landlord or third-party approvals
- Indemnification expectations
- Non-compete provisions
- Employee and customer transition plans
- Post-closing consulting or transition services expected of you
A vague line that "this entire LOI is non-binding" is not enough. The LOI should name which provisions bind—typically confidentiality, exclusivity, and governing law—and which remain non-binding until the purchase agreement is signed.
Is a Letter of Intent Binding?
This is the question most sellers actually want answered, and the honest response is: it depends.
An LOI can be entirely non-binding, partly binding, or enforceable in ways you did not expect. The outcome turns on the exact language, how complete the document is, how the parties behave afterward, and which state's law applies.
Stein Sperling's analysis of M&A letters of intent notes that while the proposed purchase price and deal structure are usually non-binding, provisions like confidentiality and exclusivity are commonly drafted to take effect immediately — regardless of whether the sale ever closes.
Typical treatment of common provisions:
| Provision | Usual Treatment |
|---|---|
| Purchase price and structure | Generally non-binding at this stage |
| Confidentiality | Often binding immediately |
| Exclusivity | Often binding immediately |
| Expenses, governing law, disputes | May be made binding by explicit language |
Here's the trap: the label "non-binding" at the top of a document doesn't automatically protect you. Vague language, overly detailed commitments, or wording that reads like a final agreement can create legal uncertainty. Sellers can even face disputes over whether they were obligated to negotiate in good faith.
Before signing, confirm:
- Which clauses bind you
- How long any binding provisions last
- What happens if the deal falls apart
Transaction counsel who regularly handle business sales catch these nuances; a general attorney may not.
What Sellers Should Review and Negotiate Before Signing
Your negotiating leverage is at its peak right now: before you sign anything, and especially before you agree to any exclusivity period that cuts off conversations with other buyers.
Look Past the Headline Price
The number at the top of the LOI tells you very little on its own. Dig into:
- How much is cash at closing versus deferred (seller financing, earn-out, escrow, or holdback)
- How working capital, debt, cash, inventory, taxes, and expenses could shrink net proceeds
- What conditions let the buyer reduce or restructure the offer after diligence, and what counts as a "material change"
A $5 million headline price can easily net well under $4.6 million once standard adjustments run through. The mechanics matter more than the headline number.
Confirm Transaction Scope
Make sure the LOI spells out which assets, contracts, licenses, intellectual property, real estate, employees, and customer relationships are included or excluded. Ambiguity here tends to surface the hard way during diligence.
Set Boundaries on Exclusivity and Diligence
DLA Piper recommends a 60- to 90-day exclusivity window as a reasonable lock-up period, warning that longer exclusivity can cost sellers other opportunities if the deal ultimately falls through. Before agreeing to any exclusivity clause:
- Set a defined end date with clear milestones
- Require the buyer to hit information deadlines to maintain exclusivity
- Build in an exit if the buyer stalls
- Limit information access to what's genuinely needed, and stage sensitive data in phases
Plan Your Post-Closing Role
If the buyer expects you to stick around for transition support, consulting, or a short employment period, negotiate the compensation, duration, and any restrictive covenants now, not after you've lost your other options.
Bring your advisory team in before you sign. At Mid Atlantic Business Brokers, we help sellers with valuation, deal structure, and negotiation strategy; your attorney handles enforceability and legal drafting. Neither role replaces the other.
What Happens After the LOI Is Signed?
Signing the LOI begins the real work of the deal. From here, the transaction moves into formal due diligence and definitive-document negotiation.
Typical sequence after signing:
- The buyer requests financial statements, tax returns, contracts, leases, customer and supplier records, employee information, and operational documents
- Both sides investigate issues, resolve discrepancies, and negotiate the representations and warranties that will go into the purchase agreement
- The buyer completes financing, quality-of-earnings review, legal, tax, and operational diligence
- The parties satisfy closing conditions, finalize transition arrangements, and sign closing documents
Pepperdine's 2026 Private Capital Markets Report found median time from LOI to close runs about 2.5 months for deals under $499,000 and 3.0 months for deals above $5 million. That window covers financing and documentation, not just diligence.
During this stretch, keep running your business normally. Preserve your records, answer requests accurately, and avoid anything that could undermine value or breach the LOI's terms.
Deals can still fall apart here. Diligence might surface a problem. Financing might not come through. The parties might not agree on final language. That outcome does not mean you did something wrong. It means the LOI did its job by surfacing issues before closing.
A seller checklist to maintain momentum:
- Organize requested documents before the buyer asks twice
- Use a secure data room rather than email attachments
- Track open questions and who owns each one
- Route all buyer communication through agreed contacts
- Document any changes to terms in writing
- Escalate material discrepancies immediately, not at closing
Common LOI Mistakes Sellers Should Avoid
Most LOI problems trace back to a handful of avoidable errors.
- Signing before understanding net economics. Price, structure, assumed liabilities, financing conditions, earn-outs, and working capital requirements all affect what actually lands in your account.
- Accepting open-ended exclusivity. An undefined lock-up period, or one with no milestones, leaves you stuck if the buyer drags their feet.
- Granting unrestricted information access. Letting a buyer contact employees or customers without your approval can damage the business regardless of whether the deal closes.
- Assuming the price can't move. It can. Buyers frequently revisit terms during diligence — a practice sometimes called a re-trade.
- Waiting too long to negotiate. Once you've signed exclusivity, your leverage drops. Negotiate hard terms before you sign, not after.
- Using a generic template or general-practice attorney. A complex sale deserves advice suited to your deal's size, structure, and industry.
Before you sign anything, confirm:
- Valuation is current and defensible.
- Financial and operational records are organized.
- Non-negotiable terms are defined before you sign.
- A backup plan is ready if this deal does not close.
Frequently Asked Questions
What is a letter of intent for a sale?
It's a preliminary document outlining the main proposed terms of a business sale (price, structure, and timeline) that creates a framework for due diligence and the definitive purchase agreement.
What are some common mistakes to avoid in a letter of intent?
The biggest ones: unclear binding-versus-non-binding language, weak payment terms, open-ended exclusivity, unrestricted buyer access to sensitive information, and signing without professional review.
What is the next step after a letter of intent?
Next comes formal due diligence, negotiation and drafting of the definitive purchase agreement, resolution of financing or approval conditions, and preparation for closing.
Is a letter of intent legally binding?
The transaction proposal itself is usually non-binding, but specific provisions like confidentiality and exclusivity often are. Enforceability depends on the document's wording, the parties' conduct, and applicable state law.
Should a seller negotiate a letter of intent?
Yes. Negotiate economics, transaction scope, exclusivity length, confidentiality terms, and post-closing obligations before signing. Your leverage is strongest at this stage and tends to decline afterward.
