You've found a buyer. Or maybe you're the buyer. Either way, someone's about to hand over a document that says, we're serious without technically saying we're committed.
That document is the Letter of Intent, and whether it helps or hurts depends entirely on how it's written and what both sides think it means.
Key Takeaways
- An LOI is mostly non-binding, but certain clauses within it (like exclusivity and confidentiality) are legally enforceable
- Sellers risk losing negotiating leverage once an LOI is signed if they don't structure it carefully
- Skipping an LOI can accelerate deals but also creates expensive misunderstandings later in due diligence
What an LOI Actually Is
An LOI is a preliminary agreement between a buyer and seller that outlines the basic terms of a proposed business sale before a formal purchase agreement is drafted. It typically covers the proposed purchase price, deal structure, timeline, and any conditions that must be met before closing.
Most of the document is non-binding. That means neither party is legally obligated to complete the transaction based on the LOI alone. The exceptions are specific clauses, usually exclusivity (also called a "no-shop" clause), confidentiality, and sometimes a breakup fee, which are written to be binding from the moment both parties sign.
What Goes Into a Typical LOI
| Section | Binding? | Notes |
|---|---|---|
| Purchase price | No | Usually a range or subject to due diligence adjustments |
| Deal structure (asset vs. stock) | No | Has major tax implications for both sides |
| Exclusivity period | Yes | Typically 30-90 days; prevents seller from shopping the deal |
| Confidentiality | Yes | Often overlaps with a separate NDA |
| Due diligence timeline | No | Sets expectations but isn't enforceable |
| Conditions to close | No | Financing, regulatory approval, etc. |
| Breakup fee | Yes (if included) | Compensates seller if buyer walks without cause |
Not every LOI includes all of these. Shorter LOIs are common in smaller deals, sometimes just two or three pages. Larger transactions, especially those involving private equity buyers, tend to produce much longer, more detailed documents.
The Case For Using One
Here's the honest reason LOIs exist: they force alignment before both parties spend real money on lawyers and accountants.
Due diligence on a mid-sized business sale can cost anywhere from $25,000 to $150,000 in professional fees when you add up legal, accounting, and advisory costs.
If the buyer and seller have fundamentally different expectations about deal structure, earn-out terms, or what "working capital" means at closing, it's far better to discover that before the formal purchase agreement is drafted.
An LOI also gives the seller something concrete to show their advisors, employees (in some cases), and lenders. It signals that a deal is in progress without disclosing sensitive terms prematurely.
- Establishes a shared framework before expensive work begins
- Gives the buyer time to conduct due diligence without the seller talking to other buyers
- Creates psychological commitment on both sides, even if it's not legally enforceable
- Identifies deal-breakers early, like disagreements over inventory valuation or real estate
The Case Against (Or At Least, The Risks)
The exclusivity clause is where sellers get hurt most often. Once you sign an LOI with a 60-day no-shop period, you've stopped the clock on your other options. If the buyer drags their feet during due diligence, you may find yourself at day 58 with no deal and no backup buyer in the pipeline.
Buyers sometimes use the due diligence period to "retrade" the deal, meaning they come back after digging into the financials with a lower price or worse terms, knowing the seller has already invested time and disclosed sensitive information.
This isn't always bad faith; sometimes the financials genuinely don't match what was represented. But it happens enough that sellers should go in with eyes open.
There's also the psychological lock-in effect. Once both parties have signed an LOI, walked through the business, and spent weeks exchanging documents, it becomes socially and emotionally harder to walk away even when you probably should. That's not a legal trap, but it functions like one.
LOI vs. No LOI: A Quick Comparison
| Factor | With LOI | Without LOI |
|---|---|---|
| Time to get to formal agreement | Slower upfront, fewer surprises later | Faster start, more rewrites later |
| Cost efficiency | Higher initial structure costs | Risk of expensive late-stage changes |
| Seller leverage | Reduced during exclusivity window | Maintained longer |
| Buyer confidence | Higher (protected during diligence) | Lower (may hesitate to invest in diligence) |
| Deal fall-through risk | Lower, due to early alignment | Higher |
How to Negotiate a Better LOI
If you're the seller, push back on the exclusivity window. Thirty days is reasonable for a small business. Ninety days is a long time to be off the market. If the buyer needs 90 days of exclusivity, ask why, and get a milestone schedule in writing so you know they're actually working.
If you're the buyer, be precise about what you mean by the purchase price. "Subject to working capital adjustment" means something specific, and if both sides have different definitions of working capital, that ambiguity will cost both of you later. Define it in the LOI.
Both sides should have an attorney review the document before signing, even if it feels premature. The binding clauses (exclusivity, confidentiality) are real. Treat them like they are.
Real Numbers Worth Knowing
- The average time from signed LOI to closed deal in a small business transaction is 60 to 120 days, according to data from BizBuySell's annual market reports
- Deals where the LOI price and final closing price differ by more than 10% account for roughly 20-25% of transactions, based on surveys by the M&A Source, a professional association for mid-market advisors
- Exclusivity periods in lower middle-market deals (companies valued at $5M to $50M) typically run 45 to 75 days
Frequently Asked Questions
Is an LOI legally binding? Partially. The document as a whole is generally non-binding, but specific clauses like exclusivity and confidentiality are enforceable once signed. Always read those sections carefully.
Can you back out after signing an LOI? Yes, in most cases. Since the bulk of an LOI is non-binding, either party can walk away without legal consequence, unless a binding breakup fee clause is included. That said, walking away after extensive due diligence can damage your reputation in a deal community, especially in smaller industries.
What happens if the buyer misses the exclusivity deadline? The exclusivity period simply expires, and the seller is free to talk to other buyers again. Some LOIs include automatic extensions if both parties agree in writing, so check the language.
Do you need an LOI for a small business sale? Not legally. Many transactions under $500,000 skip the LOI entirely and go straight to a purchase agreement. The tradeoff is speed versus structure.
Who writes the LOI, the buyer or seller? Buyers typically draft it. That gives them control over the initial framing of terms, which is one reason sellers should always have a professional review it before signing.
Conclusion
An LOI is a useful tool when both sides treat it as a working document, not a rubber stamp.
Get the exclusivity window right, define your terms clearly, and don't let the process create false urgency on either side.