What Is an LOI in Business Acquisitions? Plain-English Guide

The broker won't put it that way. The LOI shows up on a Friday afternoon with a note, "Just a formality, nothing binding," and after months of talks with the seller you're tempted to sign before the weekend. Most of that page really is non-binding, but two clauses bind you the moment the ink dries, and those two are where the deal gets decided.

The LOI is where a handshake turns into a deal, pinning down price and structure before the lawyers draft anything. It's also the last point where your bargaining position is at full strength.

What an LOI does

A letter of intent in a business purchase is a short, mostly non-binding term sheet that sets the headline terms of the deal: the price, the structure, the exclusivity window, and the timeline to a signed purchase agreement. The contract that actually closes the sale comes later.

What it signals is that both sides are serious enough to spend money on diligence and lawyers. Sign it, and the seller pulls the business off the market for you.

It pins down four things before anybody drafts a contract:

• Price and what it buys: the purchase number, and whether it's an asset or stock deal.
• Deal structure: how much is cash, how much is seller financing, and how much is held back in an earnout.
• Exclusivity: the no-shop window, when the seller takes the business off the market for you.
• Timeline: target dates for diligence and for signing the definitive agreement.

Your cash flow has to support those dollar terms later. Agree to a price the business can't service and diligence turns into an argument over the number you already signed.

Here's where most buyers get it backward. They treat the LOI like a soft, walk-away-anytime step, then anchor the whole deal to a number they never ran against the business's real cash flow.

So is it binding?

Mostly no, and that's the part that catches first-time buyers. Most of an LOI is a statement of intent you can still walk away from if diligence turns up problems.

Two clauses are the exception, and they bind you the second you sign:

• Exclusivity (the no-shop): the seller agrees not to entertain other buyers for the window, and you agree to spend real money chasing this one deal.
• Confidentiality: what you learn in diligence stays private, whether the deal closes or not.

Read those two closely before you sign anything, because they're the only obligations you carry out of the room. The rest of the page is a plan both sides can still revise.

And notice the quiet imbalance. The seller's binding win, exclusivity, is locked the day you sign. Your only protection is the price, structure and conditions you wrote in while you still had the upper hand.

Where it sits in the deal

The LOI lands between the verbal offer and the purchase agreement. You agree on terms, sign the LOI, run diligence inside the exclusivty window, then negotiate the binding contract that actually closes.

It's where you write the protections diligence will lean on later. A price that depends on the seller's earnings holding up. A structure that puts risk on an earnout instead of cash at close. A financing condition that lets you out if the loan terms shift across the window.

Those exact terms are where deals get won or lost, so the next step is drafting an LOI that protects you without killing the deal. Lock the structure and the financing conditions here, and the rest of the path to financing the acquisition follows the number you committed to.

The LOI commits your time and your exclusivity. So know the deal's real cash flow before you sign it, even if the broker wants it back by Monday.

FAQ

Is a letter of intent legally binding?

A letter of intent is mostly non-binding, but two clauses usually bind you the moment you sign: exclusivity and confidentiality. The price and structure remain a statement of intent you can revise or walk away from until the purchase agreement is signed.

What is the difference between an LOI and a purchase agreement?

The LOI sets the headline terms and is mostly non-binding; the purchase agreement is the detailed, fully binding contract that actually closes the sale. You sign the LOI first to lock exclusivity, run diligence, then negotiate the purchase agreement.

How long does an LOI last?

An LOI typically runs a 30 to 60 day exclusivity window, the time you have to complete diligence and reach a signed purchase agreement. The window is negotiable, and a buyer wanting more diligence time should set it in the LOI rather than ask for an extension later.

You cannot price an LOI you have not run the numbers on.

Keystone is where we're building that math, and it's closed while the build finishes. When it opens, the free diagnostic will return three scores and a value range with the most likely figure locked, calibrated against 10 years of BizBuySell Insight Reports and 1.6M+ SBA 7(a) loan records.

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For buyers analyzing live deals, Keystone Command ($199/mo, $1,990/yr) runs the Deal Analyzer so you know the cash flow before the LOI commits you.