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

Sign a letter of intent and two clauses bind you the moment the ink dries, even though most of the page is non-binding. Whether a letter of intent is binding is mostly a no, but those two exceptions are where the deal is decided.

The LOI is where a handshake becomes a deal, fixing price and structure before the lawyers draft anything. It is also the last point your bargaining position is at full strength.

Once you sign, the seller stops shopping and a 30 to 60 day clock starts on you. From here, every concession you want costs more than it would have before the ink dried.

What an LOI actually does in a deal

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. It is not the contract that closes the sale.

It is the signal that both sides are serious enough to spend money on diligence and lawyers. Sign it and the seller takes the business off the market for you.

The LOI fixes four things before anyone drafts a contract:

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

The dollar terms here are the ones your cash flow has to support later. Agree to a price the business cannot service, and diligence becomes an argument instead of a confirmation.

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

The LOI is the last point your bargaining position is at full strength.

Is a letter of intent binding? What binds you and what does not

This is the part that catches first-time buyers. Most of an LOI is non-binding, 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 moment 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 or not the deal closes.

Read those two clauses closely before signing anything. The rest is a plan; these are the only obligations you carry out of the room.

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

Where the LOI sits in the deal

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

The LOI is where you write the protections that diligence will rely on later. A price contingent 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 exit if the loan terms shift.

The exact terms you put in it are where deals are won or lost, which is why 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. Know the deal's real cash flow before you sign it, not after.

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.

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