SELLER EDUCATION
What Is a Letter of Intent (LOI)?
Key sections to review, what's binding vs. non-binding, and the red flags every seller should watch for before signing.
You’ve spent months marketing your business, fielding buyer calls, reviewing financials with strangers, and finally — a qualified buyer says they want to move forward. They submit a Letter of Intent.
For many sellers, this feels like the finish line. It’s not. It’s the starting line.
The Letter of Intent (LOI) — sometimes called a term sheet or offer letter — is a critical document in the business sale process. It sets the framework for the deal before either party spends significant time or money on due diligence, legal fees, or formal purchase agreements. Understanding what’s in an LOI, what’s negotiable, and what red flags to watch for can mean the difference between a successful closing and a deal that falls apart under pressure.
What Is a Letter of Intent?
A Letter of Intent is a formal document submitted by a prospective buyer that outlines the basic terms under which they are proposing to purchase your business. Think of it as a blueprint for the deal — a roadmap that both parties agree to follow as they move into the more detailed stages of due diligence and legal documentation.
The LOI is generally non-binding, meaning neither party is legally obligated to complete the transaction based solely on the LOI. However, certain provisions — most notably the exclusivity clause and confidentiality obligations — are typically binding once signed.
Most LOIs are 3 to 10 pages long and are submitted after a buyer has reviewed your Confidential Information Memorandum (CIM), held preliminary discussions with you or your broker, and completed initial financial analysis.
Key Sections of an LOI Every Seller Should Understand
1. Purchase Price and Structure
This is the section most sellers focus on — and rightfully so. The LOI will state the proposed purchase price and, critically, how it will be paid. Not all purchase prices are created equal:
- All cash at closing — the most favorable structure for sellers
- Partially seller-financed — the buyer pays a portion over time, putting some of your proceeds at risk
- Subject to an earnout — a portion of the price is contingent on future business performance after the sale
- SBA-financed — involves third-party lender approval, which adds time and conditions
Always look at the net cash you will receive at closing, not just the total stated price.
2. Deal Type: Asset Sale vs. Stock Sale
The LOI will specify whether the buyer is proposing an asset purchase or a stock (equity) purchase. In most small business transactions, buyers prefer asset purchases because they get a stepped-up tax basis and avoid inheriting unknown liabilities. This distinction has real financial implications and should be discussed with your tax advisor before you sign anything.
3. Exclusivity Period
One of the most important — and most overlooked — provisions in an LOI is the exclusivity clause. Once you sign an LOI with an exclusivity provision, you are typically prohibited from negotiating with or entertaining offers from other buyers for a defined period, usually 30 to 90 days.
This protects the buyer while they conduct due diligence. But it removes your leverage as a seller. Sellers should aim to limit exclusivity to 30–45 days, include termination rights if the buyer misses due diligence milestones, and ensure the period does not auto-renew.
4. Contingencies
Most LOIs include contingencies — conditions that must be satisfied before the buyer is obligated to proceed. Common contingencies include satisfactory due diligence, financing approval, lease assignment from the landlord, and retention of key employees. A long list of contingencies gives the buyer numerous off-ramps. Work with your advisor to understand which are standard versus which create excessive exposure.
5. Seller Transition and Non-Compete
Most LOIs will outline an expected transition period — typically 30 to 90 days after closing where you remain involved to transfer relationships and operations to the new owner. You will almost certainly be asked to sign a non-compete that prevents you from working in a competing business for a defined period, typically 2 to 5 years. Make sure the scope is reasonable and aligns with your post-sale plans.
6. Working Capital Requirements
Many LOIs include a working capital target — a minimum level of cash, receivables, and inventory that must be in the business at closing. If the business falls below this target, the purchase price may be adjusted downward. Working capital adjustments are one of the most common sources of last-minute price disputes. Make sure you understand how working capital is defined and what the baseline target represents.
Binding vs. Non-Binding: What Sellers Need to Know
The non-binding nature of the LOI is often misunderstood by sellers. Many assume that because the LOI is non-binding, it doesn’t matter much. This is a mistake.
The LOI sets expectations and tone for the entire deal. If you agree to a price and structure in the LOI, walking it back later creates friction and erodes trust. In practice, the price and deal structure agreed to in the LOI rarely change dramatically — unless due diligence uncovers something significant. The provisions that are binding — exclusivity and confidentiality — are the ones that constrain your options most. Treat the LOI seriously even though most of it is technically non-binding.
Red Flags Sellers Should Watch For in an LOI
Not all LOIs are created equal. Here are the warning signs that experienced advisors watch for:
- Vague purchase price language. If the LOI says “approximately” or “subject to final valuation,” the buyer is preserving the right to lower the price after due diligence.
- Excessively long exclusivity periods. 30 to 45 days is reasonable. 90+ days with no milestone requirements is a red flag.
- Heavy contingency language. The more open-ended the contingencies, the more leverage the buyer retains and the more risk the seller carries.
- Large earnout provisions. Tying 30 to 50 percent of your purchase price to future performance you won’t control is a significant risk.
- No good faith deposit. A buyer unwilling to put meaningful funds at risk may be difficult to close.
- Unreasonable non-compete scope. Watch for geographic scope far broader than your actual market or duration exceeding five years.
Should You Negotiate the LOI?
Yes, always. The LOI is a negotiating document. Buyers expect sellers to respond with counter-terms. This is the right time to address deal structure concerns, reduce contingency risk, and push back on aggressive exclusivity provisions.
That said, there is a balance. Over-negotiating can signal that you are difficult to work with or cause a motivated buyer to walk away. Focus your negotiation on the provisions that matter most: price structure, exclusivity terms, and contingency language. This is where having an experienced business broker or M&A advisor in your corner adds significant value.
What Comes After the LOI?
Once the LOI is signed, the deal moves into the due diligence phase. The buyer will review your financial records, tax returns, contracts, leases, HR files, and customer relationships in detail. Many deals slow down or fall apart during this stage. The best way to protect yourself is to be organized and prepared before you receive an LOI.
After due diligence comes the purchase agreement — the legally binding document that governs the actual transaction. The LOI serves as the foundation for this agreement, which is precisely why the terms you agree to in the LOI matter more than most sellers initially realize.
Final Thoughts
Receiving a Letter of Intent is an exciting milestone. But it is also the moment where the stakes get real and the negotiation begins in earnest. Take the time to understand every provision before you sign. Ask questions. Push back where it makes sense. And if you don’t have an experienced advisor in your corner, this is the moment to get one.
At Amerivest, we guide sellers through every stage of the process — from positioning your business for market to negotiating LOI terms, managing due diligence, and closing the deal. If you’re approaching the point where buyers are submitting offers, we’d welcome a conversation.
About to Receive an LOI? Don't Sign Alone.
LOI negotiation is where deals are won or lost. Amerivest guides sellers through every term — so you close with confidence, not regret.