Letter of Intent to Buy a Business: A Buyer's Guide

What is a letter of intent to buy a business?

A letter of intent, commonly shortened to LOI, summarizes the principal terms under which a buyer proposes to acquire a business. Depending on the transaction, it may look like a short letter, a detailed term sheet, or a negotiated document that sits somewhere between the two.

The LOI usually comes after the buyer has reviewed enough preliminary information to make an informed offer, but before the parties spend heavily on financial, legal, tax, operational, and lender diligence. Its job is to confirm that the buyer and seller are aligned on the basic shape of the deal before they invest in the next stage.

A well-constructed LOI does not try to replace the asset purchase agreement or stock purchase agreement. It identifies the important deal points, establishes a process, and preserves room for the findings that will emerge during diligence.

Why the LOI matters even when it is mostly non-binding

Buyers sometimes treat an LOI as a preliminary formality because the proposed acquisition is often expressly non-binding. That understates its practical importance. Once both sides sign, the purchase price and structure can become the psychological baseline for the rest of the transaction. Reopening an unclear term later may feel like a renegotiation even when the parties never fully resolved it.

The LOI also determines how the buyer will spend time and money. It can define access to records, the length of the diligence period, the seller's obligation not to solicit other offers, and the conditions that must be satisfied before closing. Those process terms can be as consequential as the headline valuation.

The core terms a business purchase LOI should address

Every deal is different, but most small business acquisition LOIs should make the following subjects visible. The document does not need a final answer to every question. It should be clear enough that the buyer, seller, lender, and advisors understand the proposed transaction they are being asked to advance.

• The legal names of the buyer, seller, and target business
• Whether the buyer intends to purchase assets or equity
• The purchase price and how it will be paid
• Any seller note, earnout, rollover equity, escrow, or holdback
• What assets and liabilities are expected to be included or excluded
• The treatment of cash, debt, inventory, and working capital
• Financing assumptions and material closing conditions
• The scope of diligence and access to information
• Exclusivity, confidentiality, expenses, and the LOI expiration date
• The target closing timeline and expected seller transition

Purchase price and payment structure

The LOI should state more than a single purchase-price number. A $3 million all-cash offer is economically different from a $3 million offer funded with buyer equity, an SBA or conventional loan, a seller note, and an earnout. The timing, conditions, and risk attached to each component matter to both parties.

If part of the price depends on future performance, the LOI should describe the intended earnout or contingent payment at a useful level. If the seller will finance a portion of the transaction, the parties should identify the principal amount and the major commercial assumptions that still need to be documented. Ambiguity here tends to become expensive once attorneys begin drafting the definitive agreement.

Asset purchase or equity purchase

An asset purchase generally means the buyer acquires specified assets and assumes specified liabilities. An equity purchase generally means the buyer acquires the ownership interests in the existing legal entity. The distinction can affect taxes, contracts, permits, employees, liability exposure, and third-party consents.

The LOI should identify the expected structure and, in an asset transaction, give a clear high-level description of what is included and excluded. Final tax and legal treatment belongs with qualified advisors, but the proposed structure should not remain hidden behind a generic statement that the buyer is purchasing the business.

Working capital, cash, debt, and closing adjustments

A purchase price can look settled while the amount delivered at closing remains uncertain. Terms such as cash-free, debt-free do not automatically answer how accounts receivable, accounts payable, inventory, customer deposits, or other operating balances will be handled.

Many buyers expect the business to be delivered with a normalized level of working capital so it can continue operating after close. The LOI may not contain the final calculation, but it should establish whether working capital is included, whether a target will be determined during diligence, and whether the price will be adjusted for a shortfall or excess. This is one of the clearest examples of a short LOI provision changing the real economics of the acquisition.

Due diligence, financing, and access to information

The buyer should be able to verify the assumptions behind the offer. The LOI commonly makes the transaction subject to satisfactory financial, legal, tax, operational, commercial, insurance, and other diligence. It may also address access to management, facilities, contracts, employees, customers, or other sensitive information at appropriate stages.

If the acquisition depends on third-party financing, the LOI should accurately describe that assumption. Buyers should avoid presenting a financed transaction as unconditional cash if lender underwriting and approval are still required. The level of detail will vary, but the written document should match how the buyer actually expects to fund the purchase.

Exclusivity, confidentiality, and timing

Exclusivity, sometimes called a no-shop provision, restricts the seller from pursuing competing transactions for a defined period. It gives the buyer room to pay advisors, work with a lender, and investigate the business without the seller continuing to market the deal. The appropriate period depends on the complexity of diligence, financing, record quality, and the speed of both parties.

The LOI should also identify when exclusivity begins, when it ends, and what happens if information is delayed or the process needs more time. Confidentiality obligations may come from an earlier nondisclosure agreement or the LOI itself. Because these provisions are often intended to be binding, they deserve particular attention from counsel.

Which parts of an LOI may be binding?

A business acquisition LOI is often a mix of binding and non-binding provisions. The proposed purchase itself, valuation, and other commercial terms may be stated as non-binding and subject to diligence and definitive documentation. Confidentiality, exclusivity, access, expenses, governing law, and similar process provisions may be expressly binding.

The wording and legal effect can vary by document and jurisdiction. Calling the entire document a letter of intent does not make every sentence harmless, and a broad non-binding statement may not cure conflicting language elsewhere. Buyers should rely on transaction counsel to determine what their specific LOI obligates them to do.

LOI versus purchase agreement

The LOI establishes the proposed framework. The definitive purchase agreement documents the actual sale. The purchase agreement typically contains detailed representations and warranties, covenants, closing conditions, indemnification provisions, schedules, adjustment procedures, and the mechanics for transferring the business.

Terms that feel minor in the LOI can become difficult to reverse once drafting begins. The cleanest process is to settle the major business points early, preserve explicit room for diligence, and let counsel build the final protections around the facts that the buyer's team verifies.

What should a buyer do before signing?

Read the LOI as both an offer and a roadmap. Confirm that the economics match your model, the financing description matches your actual plan, the diligence period is workable, and the document does not assume away an unresolved issue. Then ask acquisition counsel to review the binding and non-binding language in context.

A clear LOI will not eliminate every surprise. It will make the important assumptions visible early enough to investigate them. That is the real value of the document: not certainty, but a better-defined path from interest to an informed closing decision.