What is a letter of intent (LOI)? Definition and example
This post is for anyone about to make or receive a first offer on a small business. By the end you will know what a letter of intent (LOI) says, which parts of it are legally binding, and what a typical one looks like in numbers.
The definition in plain words
A letter of intent is the buyer putting an offer in writing, with the path to closing. It comes after the buyer has read the financials and before due diligence starts. It is usually two to five pages. Investopedia's explainer on letters of intent describes it as a document that sets out the main terms before a formal agreement is drafted.
The LOI is not the purchase agreement. The purchase agreement comes later, runs to 40 pages or more, and is the binding contract. The LOI is the frame that the lawyers fill in. Change the frame later and you will meet resistance, so get the terms right here.
What an LOI states
Most LOIs for a small business cover the same seven or eight points. The table below shows an illustrative example for a $2,000,000 home-services business bought with an SBA loan.
| Term | Illustrative LOI | What it means |
|---|---|---|
| Purchase price | $2,000,000 | The headline number, before any adjustments |
| Structure | Asset purchase | Buyer takes the assets and the name, not the old company's liabilities |
| Cash at close | $1,700,000 | $200,000 buyer equity plus a $1,500,000 SBA 7(a) loan |
| Seller note | $300,000 at 6% over 5 years | 15% of the price, paid by the business after closing |
| Working capital | Peg to be set in diligence | A normal level of receivables and inventory comes with the business |
| Exclusivity | 60 days | The seller stops talking to other buyers |
| Due diligence | 45 days from signing | Buyer checks the books, contracts and staff |
| Closing date | 90 days from signing | Target date; lenders often need most of this time |
Cash at close plus the seller note equal the price: $1,700,000 + $300,000 = $2,000,000. Lenders will read the LOI, so the sources of funds should add up. The SBA's 7(a) loan page sets the rules the lender follows for the loan part.
Other common lines: what happens to the lease, how long the seller stays to train the buyer, a non-compete, and who pays which closing costs.
Binding versus non-binding clauses
An LOI usually says, in its own words, that it is non-binding except for a short list of clauses. That list matters.
Usually binding:
- Exclusivity (a "no-shop"). The seller agrees not to market the business or negotiate with anyone else for a set period, often 45 to 90 days.
- Confidentiality. Both sides keep the talks and the shared information private. This often repeats what the NDA already says.
- Costs. Each side pays its own lawyers and advisors, whatever happens.
- Governing law. Which state's law applies if there is a dispute.
Usually non-binding:
- The price, the structure, the seller note and the closing date. Any of these can change after due diligence.
So a buyer who signs an LOI can still walk away. A seller who signs one usually cannot talk to another buyer until exclusivity ends. That is the trade: the buyer gets a quiet period to do the work, the seller gets a serious buyer who has put the terms in writing.
Where it shows up in a deal
The LOI is step six of nine in our guide on how to buy a business. Before it: the NDA, the CIM, a first look at the tax returns, and a call with the seller. After it: due diligence, the lender's underwriting, the purchase agreement, and closing.
For a seller, the LOI is the point where a listing turns into a deal. Our guide on how to sell a business covers how to compare two LOIs that look alike on price but differ on cash at close. Many sellers find that a slightly lower price with more cash at close is the better offer.
Common mistakes
- Treating the LOI as the final deal. Buyers who do not read the fine print in diligence end up renegotiating under time pressure.
- Leaving the structure vague. "$2,000,000, terms to be agreed" is not an offer. State the cash, the note, and the rate.
- Too short an exclusivity period. An SBA lender rarely closes in 30 days. Ask for 60 to 90.
- No working capital line. If the LOI is silent, the seller may drain receivables before closing. Say that a normal level comes with the business.
- Signing before talking to a lender. A pre-qualification letter before the LOI stops a deal dying at the bank.
Questions people ask
Is a letter of intent legally binding?
Mostly no. The price and terms are non-binding and can change after due diligence. The exclusivity, confidentiality and cost clauses are usually written to bind both sides, and courts generally enforce them.
How long does exclusivity last in an LOI?
Usually 45 to 90 days for a small business. Deals with an SBA loan need the longer end, because the lender's underwriting takes several weeks.
What is the difference between an LOI and a purchase agreement?
The LOI is a short, mostly non-binding summary of the deal signed before due diligence. The purchase agreement is the long, binding contract signed at or just before closing. The purchase agreement replaces the LOI.
Can a seller accept two letters of intent?
Not if the first one has an exclusivity clause. The seller can hold several LOIs before signing one, but once signed, the no-shop clause stops them negotiating with anyone else until it expires.
Sources
- investopedia.com — https://www.investopedia.com/terms/l/letterofintent.asp
- sba.gov — https://www.sba.gov/funding-programs/loans/7a-loans
Pober, M. (2026). What is a letter of intent (LOI)? Definition and example. Acquisitions.com. https://acquisitions.com/blog/what-is-a-letter-of-intent/
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