What is a Letter of Intent when selling a business?

A Letter of Intent, commonly called an LOI, is the document that formalizes an agreed price and deal structure between a buyer and seller before the full purchase agreement is drafted. It is the “we have a deal in principle” moment. It typically runs 3 to 10 pages and covers the major terms both parties have agreed on. The much longer and fully binding purchase agreement comes later.

Understand what comes after the LOI

What an LOI typically includes

Most LOIs for small business sales cover these key items: purchase price, how the deal is structured (asset sale or stock sale), payment terms at closing, any seller financing or earnout, the exclusivity period, the main conditions that need to be met before closing, and the target timeline.

The LOI does not include the full legal language of the purchase agreement. It’s a term sheet, not a contract. But the terms set in the LOI become the starting point for everything that follows, which is why getting them right matters.

Which parts of the LOI are actually binding

Most LOI provisions are non-binding. Either party can still walk away from the deal after signing. But a few clauses in nearly every LOI are binding from the moment you sign, and they have real consequences.

Exclusivity, also called a no-shop clause. Once you sign, you typically agree not to talk to other buyers, market the business, or accept other offers for the duration of the exclusivity period, usually 60 to 90 days. This is real leverage you are handing over. If the buyer finds problems during due diligence and walks away on day 85, you’ve lost three months and may have to restart with no deal momentum.

Confidentiality. Most LOIs include a binding confidentiality provision covering what you’ve shared with the buyer. This is typically mutual.

Break-up fees. Some LOIs include a fee either party must pay if they walk away without cause. These are more common in larger deals and need to be reviewed carefully.

Understand whether you need an attorney before signing

The re-trade risk during exclusivity

A re-trade is when a buyer uses information found during due diligence to come back with a lower price or worse terms. It happens more often than sellers expect. Buyers renegotiate key terms after conducting due diligence approximately 20% to 30% of the time, according to Morgan & Westfield, which has brokered thousands of small business sales. The buyer knows that with exclusivity running out and no other buyers in the picture, the seller faces a difficult choice: accept the new terms, try to renegotiate, or walk away and start over.

Research from M&A advisory firms also shows that 30% to 50% of signed LOIs never result in a closed deal. Some of that gap is financing. Much of it is re-trades and due diligence surprises that the seller did not see coming.

The best defense against a re-trade is making sure your financials are honest and well-documented before you go to market. If there are no surprises for the buyer to find, there’s nothing to use as leverage for renegotiation.

How the LOI differs from the purchase agreement

The LOI sets the framework. The purchase agreement is the full legal document that executes it. Purchase agreements for business sales commonly run 50 to 200 pages and cover representations and warranties, indemnification provisions, conditions to closing, escrow arrangements, employment terms, and dozens of other items the LOI never addressed.

The LOI anchors the negotiation. Changing the price or fundamental structure after the LOI is signed is possible, but it’s a heavier lift because both parties have already committed to a framework. What felt like a flexible conversation during LOI negotiation often becomes a harder argument once lawyers are billing by the hour.

Understand whether to use a broker for this stage

Why you need an attorney before you sign the LOI

Most sellers assume the attorney becomes important after the LOI is signed, when the purchase agreement is being drafted. That assumption is expensive.

The LOI sets the exclusivity period, the price, the payment structure, and in some cases the earnout framework. A poorly defined earnout in the LOI, a missing clause about working capital targets, or an excessively long no-shop provision can cost far more than attorney fees to fix, if they can be fixed at all.

Most first-time sellers accept the buyer’s standard 90-day exclusivity clause without negotiating it down, according to CT Acquisitions. M&A advisors generally recommend pushing for 30 to 45 days, or 60 days at most. Every extra day of exclusivity is time the buyer can spend hunting for reasons to reduce your price.

Have your attorney review the LOI before you sign it. The cost is modest. The protection is real.