Letter of Intent (LOI) Guide for Buying a Business

At some point in every acquisition, you stop talking and put something in writing. For most buyers, that first written step is a Letter of Intent, an LOI. It signals you are serious, frames the deal, and opens the door to due diligence.

This guide explains what an LOI is, what belongs in it, how it differs from a full Offer to Purchase, and how to make an offer that keeps every protection on your side.

What Is a Letter of Intent?

A Letter of Intent is a written document that outlines the proposed terms of a deal before the binding purchase agreement is drafted. It says, in effect: here is the business I want to buy, here is what I expect to pay, here is the structure, and here are the conditions that have to be met before we close.

Most of an LOI is non-binding. It is a framework, not the final contract. Only a few provisions are binding, such as confidentiality and sometimes an exclusivity period during which the seller agrees not to shop the business to other buyers while you do your work.

The LOI's real purpose is to align both sides on the major terms before everyone spends time and money on due diligence and legal drafting. It turns a verbal understanding into a shared, written starting point.

What an LOI Should Include

A well-built LOI covers the major deal points without trying to be the final contract. At minimum, it should address:

• The parties. Who is buying and who is selling.
• The business. What is being acquired (the entity, or specific assets).
• Asset sale vs. stock sale. The structure of the transaction, which has major tax and liability implications.
• Purchase price. The proposed price and how it was reached.
• Deal structure. How the price is paid: cash at closing, bank financing, any seller financing or earnout.
• What's included. Equipment, inventory, intellectual property, customer lists, and working capital.
• Contingencies. The conditions that must be satisfied before you are obligated to close.
• Due diligence period. How long you have to verify the business.
• Exclusivity. Whether the seller takes the business off the market while you proceed.
• Confidentiality. Protecting both sides' sensitive information.
• Timeline. Target dates for due diligence and closing.

Each of these can be negotiated, which is why getting them on paper early prevents painful surprises later.

Contingencies: Your Most Important Protection

The contingencies are the heart of any offer. They are the conditions that, if not met, allow you to renegotiate or walk away without penalty. For a buyer, they are everything.

The essential contingencies are:

• Satisfactory due diligence. You can verify the financials, customers, contracts, and operations, and the deal only proceeds if what you find matches what you were told.
• Financing. The deal is contingent on you securing acceptable financing, such as an SBA loan.
• Clean documentation. The financial records, leases, and licenses check out and transfer.
• Lease assignment. If the location matters, the lease must transfer on acceptable terms.
• Acceptable purchase agreement. The final contract reflects the agreed terms.

With these in place, you have created a structured path: make the offer, verify everything, and only commit once the business proves it is what it claimed to be. We map the verification work in the due diligence checklist.

Asset Sale vs. Stock Sale

One of the most consequential terms in your LOI is whether the deal is structured as an asset sale or a stock sale.

In an asset sale, you buy the specific assets of the business (equipment, inventory, customer lists, goodwill) but not the legal entity itself. This is the most common structure for small-business acquisitions, and in most cases it protects the buyer from the seller's past liabilities, since you are not inheriting the corporate entity.

In a stock sale, you buy the ownership of the entity itself, which means you inherit everything, assets and liabilities alike. Sellers tend to prefer this for tax reasons. Buyers tend to prefer an asset sale for protection.

This is not a detail to decide alone. Your attorney and accountant should weigh in, because the choice affects taxes, liability, and which contracts and licenses transfer.

Deal Structure: How the Price Gets Paid

The purchase price is only half the story. How it is paid is the other half, and it belongs in your LOI.

Most acquisitions combine a few sources. Cash at closing is the portion you and the bank bring to the table. Bank financing, in most deals an SBA loan, covers the bulk of the price against the business's cash flow. Two other structures are common:

A seller note is financing provided by the seller. They accept part of the price as payments over time rather than all cash up front. Seller financing signals the seller's confidence in the business and can bridge a gap between buyer and seller on price. Lenders like a seller note because it keeps the seller invested in a smooth transition.

An earnout ties part of the price to the business's future performance. The seller receives additional payments if the business hits agreed targets after closing. Earnouts can resolve disagreements about value: if the seller believes the business is worth more than you do based on potential, an earnout lets them prove it rather than you paying for it up front. It is a way to honor the principle of never overpaying for potential while still getting a deal done.

Spelling out the structure in the LOI (how much cash, how much bank debt, any seller note or earnout) prevents a painful misunderstanding when the definitive agreement is drafted.

LOI vs. Offer to Purchase

Most of a Letter of Intent is non-binding, and it sets the stage. An Offer to Purchase is a more complete, actionable document that can move the deal forward faster while still protecting the buyer through contingencies.

A well constructed Offer to Purchase does what an LOI does, establishing price, structure, and terms, while keeping every protection intact through the same contingencies for due diligence, financing, and documentation. The advantage is momentum: it moves the deal from "we're interested" toward "we're transacting" without giving up your ability to verify and walk away.

Being more decisive does not mean being less protected. Whether you use an LOI or an Offer to Purchase, your contingencies are what keep you safe.

How to Approach the Offer

The seller is a person, and in many cases someone who spent decades building this business. The way you make your offer matters as much as the numbers in it.

Credibility beats clever contracts. An offer that is fair, reasoned, and presented with care builds trust and keeps the deal moving. A lowball offer dressed up in aggressive legal language does the opposite. It signals you may be difficult to work with through a long, complex process.

Justify your price with the cash flow and the valuation logic. When a seller understands how you arrived at your number, real SDE and a fair multiple rather than an arbitrary discount, the conversation stays constructive. Tie your offer back to how to value a business.

Negotiating From the Offer

Once your offer is on the table, expect a negotiation, and approach it as a problem to solve together rather than a battle to win. The goal is not to extract the lowest possible price. It is to reach terms that let a good deal close and survive the transition.

Price is only one lever, and when you and the seller disagree on value, structure can bridge the gap. A seller note can lower the cash you need up front while keeping the seller invested in your success. An earnout can resolve a dispute over the business's potential by letting future results, not your checkbook, settle it. A longer transition period, a consulting agreement, or a flexible closing date can all create value for the seller without raising your price.

The buyers who negotiate best are the ones who understand what the seller wants. Some want top dollar. Many care more about their employees, their legacy, a clean exit, or certainty of closing. When you know what matters most to the person across the table, you can craft an offer that gives them that while protecting what matters most to you.

Common Mistakes Buyers Make With Offers

Skipping Contingencies to Look Aggressive

Never trade away your protections for speed. The contingencies are the whole point.

Being Vague on Structure

Leaving asset-vs-stock or the financing approach undefined creates conflict later. Be clear up front.

Overpaying to Win the Deal

An accepted offer at the wrong price is not a win. Hold to the valuation.

Treating the LOI as the Final Contract

It is a framework. The binding purchase agreement comes later, drafted by your attorney.

Forgetting the Lease and Licenses

If the location or a key license matters, make their transfer a condition.

Going It Alone

Have your attorney review the LOI before you sign anything, even a non-binding one.

Exclusivity and Timing

A few practical terms deserve special attention because they shape the balance of power in the deal.

Exclusivity, sometimes called a no-shop provision, is one of the few binding parts of an LOI. It commits the seller not to negotiate with other buyers for a defined window while you complete due diligence and arrange financing. As a buyer, you want this, because you are about to invest real time and money, and you do not want the seller using your offer to shop for a better one.

Sellers want the window kept reasonable. A typical exclusivity period spans the diligence and financing timeline, 30 to 90 days, and is worth negotiating for.

Timing ties it all together. Your LOI should set target dates: how long the due diligence period runs, when financing is expected, and a target closing date. Build in enough time for thorough diligence, but not so much that the deal loses energy. Rushing verification to hit an arbitrary date is how buyers miss problems.

Getting these terms right in the LOI prevents the most common sources of friction once the deal is underway.

What Happens After the Offer Is Accepted

Once your LOI or Offer to Purchase is accepted, the deal enters its most active phase. You begin formal due diligence, your lender moves forward on financing, and your attorney begins drafting the definitive purchase agreement that will incorporate the final terms.

This is where your contingencies do their job. As you verify the business, anything that does not match what you were told becomes a basis to renegotiate or, if necessary, walk away. If everything checks out, the deal proceeds to closing, which is not the finish line but the starting line of ownership.

Common Questions

Is a Letter of Intent Binding?

For the most part, no. Most of an LOI is a non-binding framework that outlines proposed terms before the definitive purchase agreement. Only a few provisions are binding, in most cases confidentiality and, when included, an exclusivity period. The binding commitment to buy comes later, in the purchase agreement, and remains subject to your contingencies.

What's the Difference Between an LOI and an Offer to Purchase?

Most of an LOI is non-binding, and it sets the stage for negotiation. An Offer to Purchase is a more complete, actionable document that moves the deal forward faster. A well-built Offer to Purchase keeps every buyer protection intact through the same contingencies, so being more decisive does not mean being less protected.

What Contingencies Should I Include in My Offer?

At minimum: satisfactory due diligence, financing approval, clean and transferable documentation, lease assignment if location matters, and an acceptable final purchase agreement. These contingencies are your most important protection. They let you renegotiate or walk away without penalty if what you verify does not match what you were told.

Should the Deal Be an Asset Sale or a Stock Sale?

Most small business acquisitions are structured as asset sales, where you buy specific assets and in most cases avoid inheriting the seller's past liabilities. Stock sales transfer the entire entity, including liabilities, and sellers tend to prefer them for tax reasons. The right structure depends on tax and liability factors, so your attorney and accountant should advise on it.

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