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Interactive Guide
LOI & Deal Terms Explained in Plain English
Every term you'll encounter when selling your business — from the Letter of Intent through due diligence to closing. Click any highlighted term to see what it actually means.
How to use this: Read through the sample LOI below like a real document. Every highlighted term is clickable — tap or click it to see a plain-English explanation. Then scroll down for the full deal glossary.
Price & value terms
Legal & binding terms
Protection & risk terms
Structure & payment terms
Letter of Intent
Sample document — all terms are clickable
Non-Binding Template
Parties & Purpose
This Letter of Intent ("LOI") is entered into as of [Date] between [Buyer Name] ("Buyer") and [Seller Name] ("Seller"), with respect to the proposed acquisition of [Business Name] (the "Business"). This LOI sets forth the principal terms and conditions under which the Buyer proposes to acquire the Business from the Seller and is intended to serve as the basis for negotiating a definitive Asset Purchase Agreement.
This LOI is non-binding in all respects except for the provisions relating to Exclusivity, Confidentiality, and Governing Law, which shall be legally binding upon the parties.
Purchase Price & Consideration
The total Purchase Price for the Business shall be [Amount], subject to adjustment as set forth herein. The Purchase Price has been determined based on a multiple of the Business's Seller's Discretionary Earnings (SDE) / EBITDA for the trailing twelve months, as reflected in the Confidential Information Memorandum.
The Purchase Price shall be paid as follows: (i) Cash at Closing in the amount of [Amount]; (ii) a Seller Note in the principal amount of [Amount], bearing interest at [Rate]% per annum, payable over [Term] months; and (iii) an Earnout of up to [Amount], contingent upon the Business achieving certain revenue milestones during the [Period] following Closing.
Buyer shall deposit Earnest Money of [Amount] into Escrow within five (5) business days of execution of this LOI. Said deposit shall be applied to the Purchase Price at Closing or returned to Buyer if the transaction does not close due to failure of any condition set forth herein.
Deal Structure
The acquisition shall be structured as an Asset Sale, whereby Buyer shall purchase substantially all of the Hard Assets and Intangible Assets of the Business, including but not limited to equipment, inventory, customer lists, contracts, trade names, and Goodwill. Buyer shall not assume any Liabilities of the Business except as specifically agreed in the definitive agreement.
Working Capital shall be determined at Closing and adjusted pursuant to a Working Capital Peg to be agreed upon by the parties during Due Diligence. Any Inventory shall be valued at cost and included in the Purchase Price up to [Amount], with any excess or shortage adjusted at Closing.
Due Diligence & Conditions
Buyer shall have a period of Due Diligence of sixty (60) days from the execution of this LOI (the "Due Diligence Period") to complete its review of the Business. During this period, Seller shall provide Buyer with reasonable access to all financial records, Tax Returns, customer contracts, employee records, and other materials reasonably requested by Buyer.
Buyer's obligation to consummate the transaction is conditioned upon, among other things: (i) satisfactory completion of Due Diligence; (ii) SBA Loan approval (if applicable); (iii) execution of a definitive Asset Purchase Agreement; (iv) receipt of all necessary Third Party Consents, including landlord approval for Lease Transfer; and (v) Seller's representations and warranties being true and correct as of Closing.
Representations, Warranties & Protections
Seller shall make standard Representations and Warranties regarding the Business in the definitive agreement, including representations regarding financial statements, absence of undisclosed Liabilities, compliance with applicable laws, and the accuracy of information provided to Buyer.
Seller shall be subject to an Indemnification obligation for breaches of representations and warranties, subject to a basket of [Amount] and a cap equal to [Percentage]% of the Purchase Price. Seller's Indemnification obligations shall survive Closing for a period of [Period].
Seller agrees to a Non-Compete Agreement and Non-Solicitation Agreement for a period of [Years] years within [Geographic Area] following Closing.
Transition & Operations
Seller agrees to provide a Transition Period of [Period] following Closing, during which Seller shall remain available to assist Buyer in transitioning the Business operations, customer relationships, and employee matters. Additional consulting services beyond the Transition Period may be agreed upon separately.
From the date of this LOI through Closing, Seller agrees to operate the Business in the Ordinary Course of Business and shall not, without Buyer's prior written consent, make any material changes to operations, enter into any contracts outside the ordinary course, or take any action that would materially and adversely affect the Business.
Exclusivity & Confidentiality
(Binding) Upon execution of this LOI, Seller agrees to an Exclusivity period of sixty (60) days during which Seller shall not solicit, encourage, or entertain any offers or inquiries from any other potential buyer. This provision is legally binding.
(Binding) Each party agrees to maintain strict Confidentiality regarding the terms of this LOI and the proposed transaction. Seller acknowledges that an NDA was executed prior to the disclosure of any financial information, the terms of which remain in full force and effect.
Closing
The parties anticipate that Closing shall occur on or before [Target Date], subject to satisfaction of all conditions precedent. At Closing, Seller shall deliver a Bill of Sale, all required assignments, and such other closing documents as Buyer's counsel may reasonably request.
This LOI shall expire and be of no further force or effect if a definitive Asset Purchase Agreement has not been executed by [Expiration Date], unless extended by mutual written agreement of the parties.
[Buyer Signature] [Seller Signature]
Date: _____________ Date: _____________
Date: _____________ Date: _____________
Term
Category
Plain English
Detail
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Every term you'll encounter from listing through closing — organized by category.
Price & Value
Deal Structure
Due Diligence
Protections
Closing
General M&A
Purchase Price
Price
The total amount the buyer agrees to pay for the business.
This is the headline number, but it's rarely paid all in cash at once. The full purchase price is often split between cash at closing, a seller note, and an earnout. Understanding each component is more important than the total.
SDE — Seller's Discretionary Earnings
Price
Your business's true earnings, including your salary and personal expenses.
SDE = net profit + owner's salary + owner's benefits + non-recurring expenses. It represents the total financial benefit the owner gets from the business. Most small business valuations are based on a multiple of SDE (typically 2–4x for businesses under $5M revenue).
EBITDA
Price
Operating profit before accounting adjustments — used for larger businesses.
Earnings Before Interest, Taxes, Depreciation and Amortization. Unlike SDE, EBITDA does NOT add back the owner's salary. Used for businesses over $5M revenue where the owner is replaced by a professional manager. Buyers typically pay 3–6x EBITDA at this level.
Goodwill
Price
The intangible value of your business — reputation, customer relationships, brand.
Goodwill is the difference between the purchase price and the fair market value of tangible assets. It represents everything that makes your business worth more than its equipment and inventory — loyal customers, trained staff, a strong brand, and market position.
Working Capital
Price
The cash and liquid assets the business needs to operate day-to-day.
Working capital = current assets minus current liabilities (accounts receivable + inventory - accounts payable). Most deals include a working capital target — if the business delivers less than the agreed amount at closing, the purchase price is reduced accordingly.
Add-backs
Price
Expenses that are added back to profit to show the business's true earning power.
Add-backs include the owner's salary, personal car, health insurance, one-time legal fees, or any expenses that won't continue under new ownership. Buyers scrutinize every add-back — they need to be legitimate, documented, and defensible.
Valuation Multiple
Price
The number multiplied by your earnings to arrive at the asking price.
If your SDE is $200,000 and the multiple is 3x, the business is valued at $600,000. Multiples vary by industry, growth rate, owner dependency, and deal size. A well-prepared, growing business with recurring revenue commands a higher multiple than a stagnant, owner-dependent one.
Asset Sale
Structure
The buyer purchases the business's assets, not the company itself.
In an asset sale, the buyer cherry-picks what they want to buy (equipment, inventory, contracts, goodwill) and leaves behind liabilities and legal history. Most small business sales are structured as asset sales. Buyers strongly prefer this — sellers generally prefer stock sales for tax reasons.
Stock Sale / Equity Sale
Structure
The buyer purchases ownership of the entire company, including all history and liabilities.
In a stock sale, the buyer acquires the shares of the company — meaning they inherit everything: contracts, licenses, liabilities, and legal history. Sellers often prefer stock sales because they typically result in lower capital gains taxes. More common in larger or middle-market transactions.
Seller Note / Seller Financing
Structure
The seller loans part of the purchase price to the buyer, paid back over time.
Instead of receiving all cash at closing, the seller accepts a promissory note for part of the price, repaid with interest over 3–7 years. Sellers who offer financing get more buyers, higher prices, and often better interest rates than a bank. It also signals the seller's confidence in the business.
Earnout
Structure
Additional payment the seller receives IF the business hits future performance targets.
An earnout bridges a valuation gap — if the buyer thinks the business is worth $800K but the seller wants $1M, they might agree on $800K cash plus up to $200K in earnout payments if revenue hits certain milestones over the next 2 years. Sellers should be cautious: earnouts are often hard to collect.
SBA Loan
Structure
A government-backed loan the buyer uses to finance the purchase.
SBA 7(a) loans are the most common financing for small business acquisitions. They allow buyers to purchase a business with as little as 10% down. SBA financing adds 30–60 days to the closing timeline and requires the business to be profitable and the financials to be clean and verified.
Cash at Closing
Structure
The portion of the purchase price paid in cash on the day the deal closes.
This is what the seller actually receives on closing day. In a typical deal, cash at closing is 70–90% of the purchase price — the remainder is seller note, earnout, or other deferred consideration. Always know your cash at closing number before signing anything.
Working Capital Peg
Structure
The agreed-upon amount of working capital the seller must leave in the business at closing.
This prevents sellers from draining cash before closing. If the business typically needs $150K to operate, the deal might include a working capital peg of $150K — if the seller delivers less, the purchase price is reduced dollar for dollar. Negotiating this number carefully is critical.
Due Diligence
Due Diligence
The buyer's thorough investigation of everything about the business before closing.
Due diligence typically takes 30–90 days and covers financials, tax returns, customer contracts, employee files, leases, equipment, legal history, and more. Most deals that fall apart do so during due diligence. Clean, organized records dramatically shorten this process and prevent price re-negotiations.
Quality of Earnings (QoE)
Due Diligence
An independent analysis verifying that the reported earnings are real and sustainable.
A QoE report is commissioned by the buyer (usually for deals over $1M) to validate the seller's financial claims. It examines whether add-backs are legitimate, whether revenue is recurring, and whether there are any one-time items inflating earnings. A clean QoE speeds up the deal significantly.
Normalized Earnings
Due Diligence
Earnings adjusted to reflect what the business consistently earns, removing one-time items.
Normalized earnings remove unusual items — a one-time lawsuit settlement, a COVID relief payment, an unusually large contract that won't repeat — to show what the business typically earns in a normal year. Buyers base their valuation on normalized earnings, not raw reported numbers.
Accounts Receivable (AR)
Due Diligence
Money customers owe the business for work already done but not yet paid.
AR is often included in the sale but subject to an aging review. Buyers want to know how old the receivables are — anything over 90 days is considered risky. The deal may exclude aged AR or reduce the purchase price to account for uncollectible amounts.
Customer Concentration
Due Diligence
When too much revenue comes from too few customers.
If one customer accounts for more than 15–20% of revenue, most buyers will discount the purchase price or require an earnout tied to that customer's retention. Losing a single large customer post-sale is one of the most common deal killers. Diversifying before listing significantly increases value.
Trailing Twelve Months (TTM)
Due Diligence
The most recent 12 months of financial performance.
Most valuations are based on TTM financials rather than the last fiscal year, because TTM is more current. If your business is growing, TTM works in your favor — if it's declining, buyers may insist on averaging multiple years. Always know your TTM numbers before starting the sale process.
NDA — Non-Disclosure Agreement
Protection
A contract preventing the buyer from sharing your business information with others.
Every serious buyer should sign an NDA before receiving any financial information. A good NDA covers the financials, customer names, employee details, and the fact that the business is for sale. Brokers collect NDAs automatically — FSBO sellers often skip this and regret it.
Exclusivity
Protection
A period during which the seller agrees not to talk to any other buyers.
Once you sign an LOI with an exclusivity clause, you must stop marketing the business and not entertain other offers for the duration (typically 30–90 days). This protects the buyer's investment in due diligence. Sellers should keep exclusivity periods as short as possible and include conditions for termination.
Representations & Warranties
Protection
Formal promises the seller makes about the accuracy of what they've disclosed.
Reps and warranties are legally binding statements in the purchase agreement — e.g., "the financial statements are accurate," "there are no undisclosed lawsuits," "all licenses are current." If a rep or warranty turns out to be false, the buyer can sue for indemnification. Sellers should review every rep carefully with their attorney.
Indemnification
Protection
The seller's obligation to compensate the buyer if something they promised turns out to be wrong.
If a seller's rep or warranty is breached — a hidden liability surfaces, tax returns were inaccurate, a lawsuit was concealed — the seller must indemnify (reimburse) the buyer. Indemnification is typically subject to a basket (minimum threshold) and a cap (maximum liability). The escrow holdback provides the buyer's security.
Non-Compete Agreement
Protection
A promise not to start or work for a competing business after the sale.
Buyers always require a non-compete — typically 2–5 years, within a defined geographic area or industry. Without it, a seller could theoretically sell their business and immediately open a competing one next door. Non-competes are considered part of the goodwill being purchased and must be reasonable to be enforceable.
Earnest Money
Protection
A good-faith deposit the buyer puts down to show they're serious.
Earnest money (typically 1–5% of the purchase price) is held in escrow and applied to the purchase price at closing. If the buyer walks away without cause, the seller may keep it. If the deal falls through due to a failed condition (financing, due diligence), it's typically returned. It's the seller's primary early protection against tire-kickers.
Closing
Closing
The final meeting where ownership officially transfers and money changes hands.
At closing, both parties sign all final documents (bill of sale, APA, non-compete, transition agreement), funds are wired, and the business legally changes hands. Closings are typically handled by attorneys and may be done remotely. The closing date is often delayed by SBA loan approval, lease transfers, or last-minute due diligence issues.
Asset Purchase Agreement (APA)
Closing
The final, legally binding contract that governs the entire sale.
The APA is the definitive agreement that supersedes the LOI. It details exactly what is being bought and sold, the purchase price and payment terms, all representations and warranties, indemnification obligations, and closing conditions. Never sign an APA without having your attorney review it line by line.
Bill of Sale
Closing
The document that officially transfers ownership of assets from seller to buyer.
The bill of sale is the physical transfer document — it lists all assets being transferred and confirms the seller's right to sell them. For vehicles and equipment, separate title transfers may also be required. The bill of sale is signed at closing and is the legal record of the transfer.
Escrow
Closing
A neutral third party that holds money or documents until closing conditions are met.
Escrow protects both buyer and seller — the buyer's funds are deposited with an escrow company, which releases them to the seller only when all conditions are satisfied. A portion is often held in escrow post-closing (the "holdback") as security against indemnification claims for 12–18 months.
Transition Period
Closing
The agreed time after closing when the seller helps the buyer learn the business.
Most deals include a 30–90 day transition period where the seller trains the new owner, introduces key customers and employees, and helps with the operational handoff. This is typically included in the purchase price. Longer or more involved transitions may be compensated separately as a consulting arrangement.
Lease Transfer / Assignment
Closing
The landlord's approval to transfer the existing lease to the new owner.
For location-dependent businesses, the lease is often the most critical closing condition. The landlord must approve the transfer and the new tenant. Some landlords use this as an opportunity to renegotiate terms. Always check the lease's assignment clause early in the process — a non-transferable lease can kill a deal entirely.
Letter of Intent (LOI)
General
A preliminary, mostly non-binding agreement outlining the proposed deal terms.
The LOI is not the final contract — it's a roadmap. It signals that both parties are serious and agree on the basics (price, structure, timeline). Most of the LOI is non-binding, but exclusivity and confidentiality clauses typically are binding. Once an LOI is signed, due diligence begins.
Confidential Information Memorandum (CIM)
General
A detailed document presenting the business to potential buyers.
The CIM (sometimes called a "book" or "offering memorandum") is prepared by the broker and includes financial summaries, business description, market analysis, and growth opportunities. It's shared only after an NDA is signed. A well-prepared CIM significantly increases buyer interest and deal quality.
Non-Binding
General
Not legally enforceable — either party can walk away without penalty.
Most of the LOI is non-binding, meaning either party can decide not to proceed without legal consequence. This is intentional — it allows both sides to conduct due diligence before committing to a binding contract. The exceptions (exclusivity, confidentiality) are clearly labeled as binding.
Third Party Consents
General
Approvals needed from outside parties before the deal can close.
Many contracts — leases, customer agreements, supplier contracts, franchise agreements, licenses — contain clauses requiring the other party's consent before they can be transferred. Identifying all required consents early in the process is critical. Missing one can delay or kill a closing.
Ordinary Course of Business
General
Operating the business normally, without making unusual or major changes.
From LOI signing to closing, sellers are expected to operate the business as usual — no unusual spending, no new long-term contracts, no hiring or firing key staff without buyer approval. This protects the buyer from the seller making changes that could harm the business before the transfer.
Strategic Buyer vs. Financial Buyer
General
Two very different types of buyers with different motivations and valuation approaches.
A strategic buyer (competitor, supplier, or industry player) buys your business to add to their existing operations — they may pay a premium for synergies. A financial buyer (private equity, search fund, individual investor) buys for the return on investment. Knowing which type of buyer you're dealing with shapes everything from pricing to transition expectations.
This guide is for educational purposes only and does not constitute legal advice. Business sale documents vary significantly by deal. Always work with a licensed business broker and a qualified M&A attorney when reviewing or signing any transaction documents.
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© BusinessBrokerFinder.us.com — Free to use and share.