Disclaimer. This page is educational only. It is not investment, legal, tax or lending advice, and it is not a substitute for full due diligence with your own lender, attorney and CPA. Every decision is yours.
A letter of intent, or LOI, is the document where you and the seller agree on the main terms of a deal before the heavy work of due diligence begins. Most of it is non-binding, but it shapes everything that follows. A clear LOI protects the relationship as much as it protects you.
What a first-time buyer's LOI usually covers.
- Price and what it buys. The price, and whether it is an asset or stock purchase. Say what is included: equipment, inventory, customer lists, the name.
- Structure. How the price is paid: cash at close, the bank loan, a seller note, any earnout. Name the financing contingency.
- The earnings basis. Tie the price to the earnings you have seen, so a material difference found in diligence gives you a clear reason to revisit terms. Any change you ask for later should carry a dollar amount and a document.
- Working capital and inventory. How much is delivered at close and how it is counted.
- Diligence and timing. What you will review, how long you have, and a target closing window.
- Exclusivity. A period in which the seller agrees not to shop the business.
- Transition. How long the seller will stay to help, and in what role.
- Binding provisions. Usually confidentiality, exclusivity and who pays which costs. Everything else is typically non-binding.
A word on tone. Sellers read an LOI for more than the number. They are listening for certainty of close, respect for what they built and an easy process. A letter that is clear and fair often does more for you than one that is aggressive.
Get the free checklist. 10 Questions to Ask Before You Sign an LOI is a short, lender-minded checklist covering earnings, add-backs, debt capacity, structure and the protections your letter should include. Enter your first name and email to download it. Have your attorney review any LOI before you sign.
Frequently asked questions
Is an LOI legally binding?
Mostly not. Confidentiality, exclusivity and cost provisions are usually binding; the rest typically is not. Have your attorney confirm.
What should a small business LOI include?
Price, structure and financing, the earnings basis, working capital, diligence period, exclusivity, seller transition and the binding provisions.
When do you sign an LOI?
After you have reviewed enough to make a serious offer, and before full due diligence.
Disclaimer. This page is educational only. It is not investment, legal, tax or lending advice, and it is not a substitute for full due diligence with your own lender, attorney and CPA. Every decision is yours.