How to Write a Letter of Intent (LOI) to Buy a Business
The letter of intent is where a conversation becomes a deal. Get it right and you lock up the business, set the negotiating framework, and earn the seller's trust. Get it wrong and you either scare the seller off or hand away leverage you will never get back. Here is exactly what goes in one.
The LOI at a Glance
2-4 pages
Typical Length
30-90 days
Exclusivity Period
45-90 days
Diligence Window
60-120 days
LOI to Closing
Why the LOI Matters More Than It Looks
The LOI freezes the negotiating framework. Terms you nail down now (price, structure, working capital treatment) are hard for either side to reopen later without a documented reason.
It buys you exclusivity. Once the seller signs, the business typically comes off the market and other buyers are turned away while you run diligence.
Leverage peaks at the LOI. Before signing, the seller is competing for you. After signing, you are competing with sunk costs, advisor fees, and a ticking exclusivity clock.
It is a credibility test. Sellers and their advisors read an LOI the way lenders read a loan application: a sloppy, vague, or aggressive draft tells them you will be difficult for the next 90 days.
Most of it is intentionally non-binding. That is a feature, not a loophole. It lets both sides commit to a direction before spending five figures on lawyers and accountants.
What an LOI Is (and What It Is Not)
A letter of intent to buy a business is a short document, usually two to four pages, that says: here is the price I intend to pay, here is how the deal will be structured, here is my timeline, and here is what I need from you while I verify everything. It sits between the first offer conversation and the definitive purchase agreement.
The single most important drafting rule: say explicitly which provisions are binding and which are not. Courts have enforced "agreements to agree" when the document was ambiguous about intent. A clean LOI has a clause that reads something like "Except for Sections 7 through 10, this letter is a non-binding expression of intent and creates no obligation to consummate the transaction."
Enforceable Provisions
- Exclusivity / no-shop: the seller stops marketing the business and talking to other buyers
- Confidentiality: both sides keep the deal and the data quiet (often incorporated from the NDA)
- Expenses: each party pays its own legal and accounting fees
- Access: the seller will provide the records you need for diligence
- Governing law and, sometimes, a break-up fee
Expressions of Intent
- Purchase price and how it will be paid
- Deal structure: asset purchase vs stock purchase
- Financing plan and any financing contingency
- Working capital, seller note, and earnout concepts
- Closing timeline, transition support, and employment terms
LOI vs Purchase Agreement: The Key Difference
Buyers new to acquisitions often confuse the two. The LOI is the handshake in writing: short, fast, mostly non-binding, negotiated in days. The purchase agreement is the actual contract of sale: 30 to 80 pages, fully binding, packed with representations, warranties, indemnification caps, disclosure schedules, and closing mechanics, and it typically takes several weeks of attorney drafting after diligence is substantially complete.
The practical consequence: anything you leave vague in the LOI becomes a fresh negotiation during the purchase agreement, at the exact moment you have the least leverage and the most money already spent. Decide the hard issues early and write them down.
The Anatomy of a Strong LOI
1. Purchase Price, and What It Assumes
State a specific number, not a range. "Up to $1,800,000 depending on diligence" reads as "I will retrade you." Instead, write "$1,800,000, based on the trailing twelve months seller's discretionary earnings of $600,000 as presented in the confidential information memorandum." Anchoring the price to the earnings figure it assumes does two things: it shows the seller your math, and it gives you a legitimate, pre-agreed basis to adjust if diligence reveals the earnings were overstated.
For context, most main street businesses sell for roughly 2 to 4 times SDE, and lower middle market companies typically trade at 4 to 7 times EBITDA. If your offer implies a multiple far outside the typical range for the industry, expect the seller's advisor to ask why.
2. Structure: How the Price Gets Paid
Break the total into its components. A typical small business acquisition might look like: $2,000,000 total, paid as $1,500,000 in cash at closing (funded by an SBA 7(a) loan), a $300,000 seller note over five years at a market interest rate, and $200,000 of buyer equity. Also state whether this is an asset purchase or a stock purchase. Most small business deals are asset purchases because buyers get a stepped-up tax basis and leave behind unknown liabilities; sellers often prefer stock sales for tax reasons, so flag it now rather than fight about it later.
- Cash at closing: the number the seller actually cares about most
- Seller note: amount, term, rate, and whether it is on standby for the lender
- Earnout (if any): the metric, the measurement period, and who controls the business while it runs
- Rollover equity (if the seller keeps a stake): percentage and rights
- Asset vs stock purchase, and who bears which taxes
3. Financing Contingency
If you need a loan, say so plainly: "This offer is contingent on Buyer obtaining SBA 7(a) financing of approximately $1,500,000 on commercially reasonable terms. Buyer has been pre-qualified by [lender] and will submit a complete loan application within 10 business days of acceptance." A hidden financing need discovered in week six is one of the fastest ways to lose a seller's trust. Naming your lender and your pre-qualification converts the contingency from a red flag into evidence you are organized.
4. Exclusivity (the No-Shop Clause)
This is usually the only thing you get that is binding, so make it count. Ask for 60 days for a conventionally financed deal, 75 to 90 days if SBA underwriting is involved. Include an automatic extension (often 30 days) if you are proceeding in good faith and the delay is with the lender or a third party. Sellers will push back on anything open-ended, and they are right to: exclusivity takes their business off the market while you decide.
5. The Due Diligence Window
Define what you will review and how long it will take: typically 45 to 90 days covering financials, tax returns, customer concentration, contracts, leases, employees, and legal exposure. Commit to a written diligence request list within a set number of days after signing. Our business acquisition due diligence checklist covers exactly what to request; referencing a concrete list in the LOI signals to the seller that your process will be finite, not a fishing expedition.
6. The Other Key Terms
Short paragraphs each, but do not skip them:
- Working capital: is a normalized level of inventory and receivables included in the price, or is the deal cash-free, debt-free? This single omission causes more late-stage fights than any other.
- Seller transition: how long the seller stays post-close and at what compensation (30 to 90 days of included transition support is common, longer arrangements are usually paid)
- Non-compete: duration and geography you expect from the seller (3 to 5 years within the market area is typical)
- Key employees: whether the deal depends on specific people signing offer letters or retention agreements
- Escrow or holdback: any portion of the price held back against indemnification claims
- Conditions to closing: lease assignment, license transfers, landlord consent, franchisor approval
- Timeline: target dates for the purchase agreement draft, financing commitment, and closing
How Much Detail Is the Right Amount?
There is a real tension here. Too thin, and every material term becomes a purchase agreement fight. Too heavy, and you spend three weeks negotiating a document that is mostly non-binding anyway, burning the seller's patience before diligence even starts. The test for any given term: would disagreement on this point kill the deal? If yes, it goes in the LOI. If it is mechanics, leave it for the lawyers.
Belongs in the LOI
- Price and the earnings figure it assumes
- Cash at closing vs seller note vs earnout split
- Asset vs stock structure
- Working capital treatment
- Exclusivity length and diligence window
- Financing contingency and lender status
- Seller transition and non-compete expectations
Save for the Purchase Agreement
- Full representations and warranties language
- Indemnification baskets, caps, and survival periods
- Detailed disclosure schedules
- Exact allocation of the purchase price across asset classes
- Closing deliverables and escrow mechanics
- Employee benefit plan treatment line by line
Pressure-test your number before you put it in writing
BridgeBook's free valuation calculator takes about 5 minutes. Run the target business's revenue and earnings through it and see whether the asking price, and your offer, sit inside a defensible range before you commit a figure to paper.
An LOI Template for a Business Acquisition, Clause by Clause
Here is the skeleton most letters of intent follow. Adapt the order and headings freely; what matters is that each item is addressed somewhere. Draft the business terms yourself if you like, then have an M&A attorney review the whole document, especially the binding-terms clause, before you send it.
One more structural note: some buyers send a one-page "indication of interest" (IOI) before the LOI, with just a price range and structure concept. That is common in competitive processes for larger businesses. For most main street deals, a well-drafted LOI is the first written offer the seller sees.
What Sellers and Their Advisors Look For
When several LOIs land on a broker's desk, the highest number does not automatically win. Advisors score offers on certainty of close, because a deal that dies in week ten costs the seller months of momentum and confidentiality risk. Here is what makes an LOI read as credible:
Proof of Funds
Attach evidence of your equity injection: a bank or brokerage statement (redacted is fine) covering your down payment plus working capital reserves. An offer without proof of funds is a conversation, not an offer.
Financing Credibility
A named lender and a pre-qualification letter. SBA 7(a) loans fund most deals under $5,000,000, and brokers know which lenders actually close. Naming one they recognize moves you to the top of the pile.
Realistic, Specific Terms
A specific price tied to stated earnings, a finite diligence list, and a timeline with dates. Vague terms read as inexperience; aggressive terms (120-day exclusivity, giant holdbacks) read as a future retrade.
Fit and Follow-Through
A short cover paragraph on who you are and why this business: relevant operating experience, plans for the employees, respect for the seller's legacy. Sellers routinely pick a slightly lower offer from a buyer they trust with their team.
Common LOI Mistakes That Kill Deals
- Offering a price range instead of a number: sellers hear the bottom of the range, advisors hear "retrade coming"
- Skipping the working capital clause, then discovering at the purchase agreement stage that you and the seller disagree by $150,000 on what is included
- Hiding a financing need, or writing "cash offer" when the cash is actually a loan you have not applied for yet
- Asking for exclusivity with no end date, or with unilateral extensions that let you sit on the business indefinitely
- Failing to state which provisions are binding, the ambiguity that generates most LOI litigation
- Negotiating the LOI like it is the purchase agreement: three weeks of redlines on non-binding language exhausts goodwill you will need in diligence
- Going silent after signing: no diligence request list, no lender updates. Deals lose momentum in silence, and sellers who feel ignored start returning other buyers' calls the day exclusivity lapses
- Retrading without receipts: reopening price late in the process without a documented diligence finding to justify it
Buying through a brokered process? On BridgeBook's NDA-gated marketplace, buyers work through the firm rather than approaching sellers directly, so your LOI and supporting documents go to the advisor managing the process. That is normal, and it works in your favor: a complete, credible package is exactly what gets surfaced to the seller first.
From Signed LOI to Purchase Agreement (Step by Step)
1. Deliver Your Diligence Request List (Days 1-5)
Send the written request list you committed to in the LOI. Work from a structured checklist so nothing gets missed and nothing gets added later, our due diligence checklist is built for exactly this. Set a weekly call cadence with the seller or broker from day one.
2. Submit the Full Loan Application (Days 1-10)
If the deal is financed, get the complete package to your lender immediately: the LOI, the business financials, your personal financial statement, and your resume or acquisition plan. SBA underwriting typically takes 45 to 75 days from complete application to commitment, and the bank will order its own third-party valuation of the business. The lender clock, not the lawyer clock, usually determines your closing date.
3. Verify the Earnings (Weeks 2-6)
Your accountant reconciles the claimed SDE or EBITDA against tax returns, bank statements, and payroll records. This is where price adjustments are legitimately born. If verified earnings come in 15 percent below the figure your LOI price assumed, you have a documented basis to adjust, precisely because you anchored the price to a stated earnings number.
4. First Draft of the Purchase Agreement (Weeks 4-8)
Buyer's counsel usually drafts. A good LOI makes this fast: the lawyers translate agreed terms into binding language and negotiate the genuinely new material (reps and warranties, indemnification caps, disclosure schedules). If you find yourself renegotiating price, structure, or working capital here, the LOI was too thin.
5. Resolve Findings Like a Professional (Weeks 6-10)
Diligence always finds something. The professional move is to bring findings to the seller with documentation and a proposed fix: a price adjustment, an escrow, a specific indemnity, or acceptance of the risk. Bundle issues into one conversation rather than a drip of weekly bad news. Sellers can absorb one honest renegotiation; nobody survives five.
6. Close and Transition (Weeks 10-16)
Financing commitment lands, the purchase agreement is signed, third-party consents (landlord, franchisor, license transfers) clear, and funds move through escrow. The seller transition you negotiated in the LOI starts the next morning. For the full picture of everything before and after this stage, read our guide on how to buy a business from search through closing.
Frequently Asked Questions
Is a letter of intent to buy a business legally binding?
Mostly no. The core deal terms in an LOI (price, structure, closing conditions) are typically non-binding expressions of intent. However, most LOIs contain a few provisions that are binding: exclusivity (the no-shop clause), confidentiality, expense allocation, and governing law. Always state explicitly which sections bind the parties and which do not.
What is the difference between an LOI and a purchase agreement?
The LOI is a short, mostly non-binding summary of the deal you intend to do: price, structure, timeline, and exclusivity. The purchase agreement is the long, fully binding contract that actually transfers the business, complete with representations, warranties, indemnification, and schedules. The LOI sets the framework; the purchase agreement executes it. Terms you skip in the LOI get negotiated later, usually with less leverage.
How long should the exclusivity period in an LOI last?
Most exclusivity periods run 30 to 90 days, with 60 days being a common midpoint for main street and lower middle market deals. SBA-financed deals often need 75 to 90 days because lender underwriting takes time. Ask for enough time to realistically finish diligence and financing, and offer an automatic extension if you are proceeding in good faith. Sellers resist open-ended lockups.
Can the price change after the LOI is signed?
Yes. Because price is non-binding, either side can revisit it before the purchase agreement is signed. Legitimate reasons include diligence findings that materially change the earnings picture. Retrading without a documented reason destroys trust and often kills the deal. The best protection for both sides is a specific LOI: state the price, what it assumes, and what discoveries would justify an adjustment.
Do I need a lawyer to write a letter of intent?
You can draft the business terms yourself, and many buyers do, but have an M&A attorney review the LOI before you sign it. The binding provisions (exclusivity, confidentiality, expenses) are real contractual obligations, and sloppy language about which terms bind the parties is one of the most litigated LOI problems. A one-hour attorney review is cheap insurance on a six or seven figure purchase.
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