What Is a Letter of Intent in a Business Sale

What an LOI Actually Is

A letter of intent — sometimes called a term sheet, an indication of interest (IOI) at the very early stage, or a memorandum of understanding — is the document that turns a buyer's verbal interest into something the seller can actually negotiate. It is the bridge between marketing and diligence. Most LOIs are 4 to 8 pages and most provisions are non-binding, but a handful of provisions ARE binding and can hurt you if you do not read them carefully.

If you have made it to the LOI stage, you are past the early conversations. The buyer has reviewed your quality of earnings or seller-prepared financials, signed an NDA, and is willing to commit to formal diligence. The LOI signals real intent.

What Goes Into an LOI

Every LOI is different, but a complete one will address all of the following. If a buyer's draft skips any of these, ask why before you sign.

• Purchase price: Stated as enterprise value or equity value, usually with a working capital target.
• Deal structure: Cash at close, seller note, rollover equity, earnout, escrow holdback.
• Asset vs stock sale: This affects taxes, liability, and contract assignability — not a small detail.
• Exclusivity: Almost always 30 to 90 days. This IS binding.
• Working capital target: The peg the seller must hit at close to avoid a post-close adjustment.
• Diligence timeline: When diligence will start, what the buyer needs, and the path to a definitive purchase agreement.
• Conditions to close: Financing, key employee retention, customer consents, regulatory approvals.
• Confidentiality: Reaffirms or extends the existing NDA. This IS binding.
• Expense reimbursement / break-up fees: Less common in lower-middle-market deals but worth checking.

Which Parts Are Binding

This is where sellers get burned. The headline price is non-binding — the buyer can re-trade after diligence if they find something they do not like. But four sections are typically binding from the moment you sign:

• Confidentiality. You cannot shop the deal or share details with anyone outside your deal team.
• Exclusivity (the no-shop). You cannot talk to other buyers during the exclusivity period. This is the most consequential binding clause.
• Expenses. If the LOI says either party pays its own expenses regardless of outcome, that is binding.
• Governing law and dispute resolution. Where any LOI dispute gets handled.

Negotiate exclusivity carefully. A 30-day exclusivity protects your leverage; a 120-day exclusivity hands the buyer all of it. Most lower-middle-market LOIs land at 45 to 60 days with one mutually-agreed extension.

Why the LOI Matters More Than Sellers Think

Once you sign an LOI, your leverage drops dramatically. The buyer has exclusivity, knows you are committed, and now controls the diligence pace. Re-trades — buyer-driven price reductions during diligence — happen in roughly 30% of lower-middle-market deals, and the average re-trade is 5% to 15% of the original price. The way to fight re-trades is not in the purchase agreement; it is in how clean and complete your LOI is.

That means your LOI should pin down as many specifics as possible: the working capital target methodology, the definition of EBITDA and the agreed add-backs, the indemnification cap and survival period, the escrow size, the earnout mechanics if any. The more you nail down before signing, the less the buyer can re-trade later. For a deeper look at what comes next, read what happens during business sale due diligence.

LOI vs Purchase Agreement: How They Differ

The LOI sketches the deal; the purchase agreement (asset purchase agreement or stock purchase agreement) builds it out. The LOI is short, mostly non-binding, and signed in a week. The purchase agreement is 80 to 150 pages, fully binding, and takes 30 to 60 days of legal negotiation. The LOI sets the framework; the purchase agreement nails every detail — reps and warranties, indemnification, escrow mechanics, post-close adjustments. A good LOI makes the purchase agreement faster and cheaper because the major economics are already settled.

How LOIs Affect Your Valuation

The number on the LOI is the buyer's best opening offer based on the information they had at signing. From there, only two things can move it: diligence findings (which usually move it down) or new information you provide (which can occasionally move it up). Sellers who run a competitive process — multiple buyers, multiple LOIs in the same week — close at prices 8% to 15% higher on average than sellers who negotiate with a single buyer. Competitive tension at the LOI stage is the single biggest lever on final price.

If you are at the LOI stage right now, the cleanest playbook is: get more than one LOI, choose the best combination of price and terms (not just price), negotiate exclusivity down to 45-60 days, and use the leverage of competing offers to lock in the working capital methodology and add-back schedule. For broader context on what buyers consider when they value your company, read about what business buyers look for — and use the YourExitValue valuation calculator to baseline what your business would price at before you receive any LOI.

Exit Implications: What Sellers Should Do Before Signing

Three moves before you sign:

• Have your tax advisor model the after-tax proceeds. A higher gross price in an asset sale can produce lower after-tax dollars than a lower gross price in a stock sale. The structure matters as much as the headline number — and it ties directly to how much you need to retire from your business.
• Have your attorney mark up the binding sections. Specifically the exclusivity period, the no-shop scope, and any expense reimbursement.
• Pre-package the diligence room. The faster you can deliver clean diligence materials, the lower the chance of a re-trade. Sellers who deliver a complete data room within 7 days of signing close at higher prices than sellers who drag.

The LOI feels like the finish line. It is actually the starting gun for the most consequential 90 days of the entire sale process. Get it right and the rest goes smoothly. Get it wrong and you will spend 60 days fighting re-trades.