A Letter of Intent is the document that formally bridges informal negotiations and a binding purchase agreement. It captures the agreed-upon terms in writing before either party commits to a final deal, and it sets the tone for everything that follows.

What a Letter of Intent Actually Does

Before a business changes hands, both parties need a shared understanding of what is being sold, at what price, and under what conditions. The Letter of Intent, sometimes called a Memorandum of Understanding or Agreement in Principle, puts that shared understanding on paper. It is not a final contract. In most cases, it is intentionally non-binding, which gives both sides room to complete due diligence and finalize financing without being locked into terms that may shift as more information surfaces.

That said, non-binding does not mean inconsequential. The LOI creates a practical and moral framework that both parties are expected to honor. Once signed, the buyer typically gains access to confidential business records and begins the due diligence process. The seller, in turn, agrees to take the business off the market for a defined period, usually between 45 and 60 days, and stops entertaining offers from other potential buyers. If you are considering whether to acquire a business, understanding the LOI is one of the first things you need to get right.

Key Elements the LOI Must Address

A well-constructed Letter of Intent is not a vague expression of interest. It covers the specific terms that will form the backbone of the final Purchase and Sale Agreement. While every transaction is different, the following components are standard in most LOIs.

Purchase Price and Deal Structure

The LOI states the total consideration being offered and how it will be paid. This includes the breakdown between cash at closing, seller financing, earnouts, or equity rollovers. It also specifies whether the transaction is structured as an asset sale or a stock sale, which has significant tax and liability implications for both parties.

What Is and Is Not Included

Not every asset transfers automatically. The LOI should clearly define which assets are included in the sale, such as equipment, inventory, intellectual property, and customer contracts, and which are excluded. Liabilities follow the same logic. Buyers need to know what obligations they are assuming, and sellers need to know what they are retaining.

Non-Compete and Consulting Agreements

Most buyers expect the seller to sign a non-compete agreement as part of the transaction. The LOI outlines the scope, geography, and duration of that restriction. If the seller will remain involved in the business post-closing through a consulting or management role, those terms are also addressed here, including compensation and duration.

Contingencies and Conditions

The LOI identifies what must happen before the deal can close. Common contingencies include satisfactory due diligence, buyer financing approval, landlord consent for lease assignments, and regulatory clearances. These conditions protect the buyer from being forced to close on a deal that does not hold up under scrutiny.

Confidentiality and Exclusivity

Two provisions in the LOI are typically binding even when the rest is not. The buyer agrees to keep all disclosed information strictly confidential and to refrain from sharing that the business is even in negotiations. The seller agrees to exclusivity, meaning no other buyers will be contacted or entertained during the due diligence window. A breach of either provision can expose the offending party to legal liability.

Timing and Closing Logistics

The LOI sets a timeline. This includes the deadline for completing due diligence, the target closing date, and any drop-dead dates that would allow either party to walk away if conditions are not met. It also addresses who is responsible for specific closing costs, such as environmental assessments, title searches, and legal fees.

Representations, Warranties, and Brokerage Fees

Standard representations and warranties are referenced in the LOI and will be expanded in the final agreement. These are the legal assurances each party makes about the accuracy of the information they have provided. The LOI also clarifies who is responsible for paying brokerage or advisory fees and in what amount.

Why the LOI Matters Beyond the Paperwork

The LOI does more than document terms. It reveals how both parties approach the transaction. A buyer who submits a vague or incomplete LOI signals inexperience or a lack of seriousness. A seller who pushes back on reasonable terms without explanation can raise red flags about their willingness to close. Advisors on both sides use the LOI as a diagnostic tool to identify potential deal-breakers early, before significant time and money have been spent.

From a practical standpoint, the LOI also gives the buyer a foundation for securing acquisition financing. Lenders want to see that a deal is structured and that the seller is committed to the process. A signed LOI provides that evidence. It is not a guarantee of financing, but it is often a prerequisite for lenders to begin their own review.

Common Mistakes to Avoid

Buyers sometimes treat the LOI as a formality and rush through it to get to due diligence. That approach creates problems. Terms that are left vague in the LOI tend to become points of contention later, when both parties have invested more time and emotion into the deal. Sellers make the opposite mistake, assuming that because the LOI is non-binding, they can revisit agreed-upon terms after due diligence is complete. Doing so damages trust and often kills deals that were otherwise viable.

Both parties benefit from having experienced advisors review the LOI before signing. A business broker or M&A advisor can identify gaps, flag unrealistic terms, and ensure the document reflects a deal that can actually close.

The LOI as a Starting Point, Not a Finish Line

Signing a Letter of Intent is a meaningful milestone, but it is the beginning of the formal transaction process, not the end. Due diligence, financing, legal documentation, and final negotiations all follow. The LOI simply ensures that both parties are aligned on the fundamentals before those steps begin. A clear, thorough LOI reduces friction downstream and increases the likelihood that the deal reaches closing on terms both sides can accept.

If you are preparing to sell or acquire a business and want guidance on structuring a transaction that holds together from LOI through closing, working with an experienced advisor from the start makes a measurable difference in outcomes.