How to Write a Letter of Intent to Buy a Business: The Buyer’s LOI Playbook (2026)

A Letter of Intent is the 2-5 page document that transitions a business acquisition from informal conversation to formal process. It is non-binding for economic terms but binding for confidentiality and exclusivity. It anchors price, working capital methodology, earnout structure, indemnification cap, R&W insurance commitment, and tax structure preference. It commits the seller to a 60-90 day exclusivity period during which they cannot solicit, negotiate, or close with any other buyer. And it gives the buyer the leverage of a committed counterparty for the diligence and PSA negotiation process that follows. For a deeper look, see our guide on letter of intent business purchase. For a deeper look, see our guide on letter of intent what it means and what to watch for.

This guide is the buyer-side playbook for writing LOIs. We’ll walk through the 13-15 standard sections, what to include, what to leave out, common owner pushback, the exclusivity period mechanics, and the specific language that protects the buyer through diligence. The goal: by the end of this guide, you should be able to draft a buyer-favorable LOI in 90 minutes that locks in the economic terms you need and gives you 60-90 days of clean diligence runway.

Our framework comes from working alongside 76+ active U.S. lower middle-market buyers and the broader sub-LMM ecosystem. We’re a buy-side partner. The buyers pay us when a deal closes — not the seller. That includes search funders writing their first LOI to acquire a $1.5M EBITDA target, independent sponsors running 6-12 month deal-by-deal capital raises, and PE platforms running add-on acquisitions on tight timelines. The patterns below are what we’ve seen in actual transactions; they’re not theoretical.

One philosophical note before we start. An LOI is a negotiation tool, not a wish list. The seller’s first counter to your LOI typically pushes back on 4-6 items: price (always), exclusivity (often), working capital methodology (sometimes), tax structure (sometimes), earnout sizing (sometimes), close conditions (often). Build the LOI knowing it will get redlined; anchor each economic term at a position you can defend down by 5-15% in negotiation. Items where you have no flex (exclusivity duration, financing condition for SBA buyers, tax structure for S-corp 338(h)(10)) should be drafted with explicit and uncompromising language.

“First-time buyers think the LOI is a piece of paper before the real document. Sophisticated buyers know the LOI is the document. The PSA implements what the LOI commits. Items anchored in the LOI are settled. Items left unanchored become open negotiations on every PSA redline. The buyers who win are the ones who write LOIs like they’re already binding — aggressive but reasonable, specific where it matters, with a buy-side partner who already knows what the seller will accept.”

Key Takeaways

• LOI runs 2-5 pages with 13-15 standard sections. Non-binding for economic terms; binding for confidentiality, exclusivity, and treatment of expenses.
• Anchor in the LOI: working capital methodology AND target dollar amount, earnout sizing and metric, indemnification cap, R&W insurance commitment, tax structure preference (asset purchase or 338(h)(10) for S-corp), exclusivity period (60-90 days hard).
• Leave for the PSA: specific representation language, detailed disclosure schedules, specific closing condition mechanics, employee transition specifics, customer notification protocols.
• Common seller pushback: extending exclusivity from 60 to 90 days, loosening to ‘good faith’ exclusivity, pushing back on tax structure, tightening closing conditions. Hold firm on exclusivity and tax structure.
• Aggressive but reasonable price: 5-10% above your true reservation. Working capital peg specified by methodology AND target. Earnout if applicable: 15-25% of price, revenue-based, 18-24 month window.
• Exclusivity period is binding even though the rest of the LOI is non-binding. Once the seller signs, they cannot solicit other buyers for the exclusivity duration. This is the buyer’s leverage anchor for the diligence period.

Why the LOI matters more than first-time buyers think

First-time buyers regularly treat the LOI as preliminary. They sign quickly to preserve momentum, leave economic terms vague, and plan to ‘fight in the PSA.’ This is the single most expensive misconception in buyer-side M&A. The LOI is non-binding for economic terms, but it sets the negotiation anchor for everything. Items anchored in the LOI become settled assumptions in the PSA; items left unanchored become open battles on every PSA redline.

What the LOI actually does. Three functions. First: anchors economic terms (price, working capital methodology, earnout, indemnification cap, R&W commitment, tax structure). Second: commits the seller to exclusive negotiation for 60-90 days — the seller can’t shop the deal during diligence. Third: defines the process (diligence period, expense responsibility, termination rights, governing law). Without these three functions, buyers run diligence with sellers who keep accepting other LOIs and shifting terms mid-process.

What ‘non-binding’ actually means. Most of the LOI is non-binding for economic terms — meaning either party can theoretically walk before signing the PSA. But three sections are typically binding: confidentiality (the seller’s information stays confidential), exclusivity (the seller can’t shop the deal), and treatment of expenses (each party bears its own). The exclusivity binding language is the buyer’s leverage anchor; without it, the seller can sign your LOI on Monday and accept a higher offer on Friday.

How the LOI anchors price. Once you write ‘$5,000,000 purchase price’ in the LOI, the negotiation moves around that anchor. Sellers may counter at $5.5M; you may concede to $5.2M in the PSA. But the negotiation no longer happens in the abstract — both sides are working off the LOI’s number. Anchoring at $5M with a clear pre-stated reservation of ‘$4.7M’ means you can comfortably negotiate down 6%. Anchoring at $5.5M with a true reservation of $5M means you have 9% of room. Smart buyers anchor 5-10% above their true reservation.

How the LOI anchors working capital. Working capital adjustment is typically the largest unhedged value transfer in M&A — can swing 5-15% of purchase price ($250K-$750K on a $5M deal). If the LOI specifies methodology (TTM average vs 3-month vs same-month-prior-year) AND target dollar amount, the working capital negotiation becomes implementation. If the LOI is silent, the working capital negotiation reopens in the PSA as a $250K-$750K open question. Always specify both.

The 13-15 standard LOI sections (what every buyer-side LOI should contain)

A buyer-side LOI typically has 13-15 numbered sections plus a brief introductory and signature block. The structure below reflects the conventions of LMM and sub-LMM transactions. Larger deals add additional sections (regulatory considerations, antitrust, financing details for committed-debt-financed deals); smaller deals occasionally collapse sections. The list below is the universal core.

Section 1: Header, parties, and introductory paragraph. Identifies the buyer entity (or proposed entity), the seller entity, the target business, and the proposed transaction. Names the legal counsel for each side if known. States the LOI is preliminary and non-binding except for specifically-identified binding sections (confidentiality, exclusivity).

Section 2: Purchase price. Single dollar number. Stated as ‘subject to adjustments described in Section 3 below.’ Specify whether the price is debt-free / cash-free (most LMM deals), or includes debt and cash (less common but possible). Specify the assumed cash, debt, and working capital baseline as of the LOI date.

Section 3: Purchase price adjustments. Working capital adjustment methodology: TTM average, 3-month average, or same-month-prior-year. Working capital target dollar amount or ‘collar’ range. Working capital adjustment timing (typically 60-90 days post-close). Cash adjustment (cash at close goes to seller in debt-free / cash-free structures). Debt adjustment (debt at close paid off from purchase price). Specific exclusions from working capital (deferred revenue, customer deposits, related-party balances, etc.).

Section 4: Form of consideration. All-cash at close, or cash + earnout, or cash + seller note, or cash + equity rollover, or hybrid. Specify dollar amounts and terms for each component. Cash at close is typically 60-90% of total consideration in LMM deals; the balance is earnout, seller note, or rollover.

Section 5: Earnout structure (if applicable). Earnout sizing (typically 10-25% of total purchase price). Measurement metric (revenue, gross margin, EBITDA — revenue is buyer-favorable, EBITDA is seller-favorable). Measurement period (12, 18, 24, 36 months). Annual targets or single cumulative target. True-up timing (annual or end of period). Caps and floors. Anti-manipulation provisions.

Section 6: Tax structure preference. Asset purchase (buyer’s typical preference for liability and depreciation step-up). Stock purchase with 338(h)(10) election for S-corp targets. Pure stock purchase for C-corp targets where 338 isn’t available. Specify any gross-up the buyer commits to for 338(h)(10) elections. Specify allocation of transfer taxes (typically split or borne by seller).

Section 7: Diligence period. Typically 60-90 days from LOI signing. During this period, buyer has access to financial statements, customer/supplier information, employee records, real estate documents, etc. Specify the scope of diligence (financial QoE, legal, tax, environmental, IT, HR). Specify the buyer’s diligence team (counsel, accountants, environmental consultant).

Section 8: Exclusivity period. Mirrors the diligence period (60-90 days). Binding on the seller. Seller cannot solicit, negotiate, or accept any competing offer during the period. Penalty for breach typically capped at the buyer’s diligence costs ($25-100K). Some LOIs include ‘tail period’ protections for 90-180 days post-LOI termination, where if the seller closes with a buyer they were introduced to during the LOI period, the original buyer has rights to a fee.

Section 9: Conditions to closing. Buyer-side: accuracy of seller’s reps at close, no material adverse change, regulatory approvals (if applicable), customer/lease consents, financing condition (with break-fee structure if applicable). Seller-side: receipt of purchase price. Specify any deal-specific conditions (e.g., ‘company has executed multi-year contracts with top 5 customers’).

Section 10: Termination rights. Mutual termination by written agreement. Buyer termination on diligence findings (during diligence period). Seller termination if buyer fails to close after diligence (with buyer break fee if specified). Automatic termination if not closed by outside date (typically 90-150 days from LOI). Effect of termination (each party bears own expenses, except confidentiality and exclusivity provisions survive).

Section 11: Confidentiality. Binding section. Buyer agrees to keep all seller information confidential, return or destroy at termination, limit access to advisors and counsel. Mirrors a stand-alone NDA. Seller’s existing NDA (if any) typically supersedes or coexists with this section.

Section 12: Treatment of expenses. Each party bears its own expenses unless otherwise specified. Some LOIs include break-fee provisions (buyer pays seller a fee if buyer walks without cause; seller pays buyer a fee if seller breaches exclusivity). Break fees are more common in larger deals; LMM deals typically rely on diligence-cost-recovery as the only damages.

Section 13: Governing law and jurisdiction. Specify governing law (typically Delaware for institutional buyers, state of incorporation for sub-LMM). Specify jurisdiction for disputes. Specify venue (federal vs state court). Some LOIs include alternative dispute resolution (mediation or arbitration before litigation).

Sections 14-15: Non-binding language and signature block. Explicit statement that all sections except 11 (confidentiality), 8 (exclusivity), and 12 (expenses) are non-binding. Statement that no party intends to be legally bound except for those specific sections. Signature block for both parties. Date of signing. Counterpart signature provisions.

The price section: aggressive but reasonable

Price is the headline anchor. Sellers and their advisors evaluate LOIs primarily on price. A buyer who anchors low loses the seller’s interest; a buyer who anchors too high creates negotiation room they don’t need and may win the seller but lose money in the PSA. The right anchor is 5-10% above your true reservation price.

Calculating your true reservation. Build the deal model. What does this business produce in EBITDA / SDE? What multiple can you justify (your DSCR math for SBA, your IRR math for sponsor, your platform synergy math for PE)? What’s the most you’d pay where the deal still hits your target return? That’s your reservation. Anchor 5-10% above. Example: reservation $4.5M, anchor at $4.75-5.0M.

Specifying price clearly. ‘$5,000,000 (Five Million Dollars), subject to adjustments described in Section 3.’ Round numbers signal confidence. Decimal pricing ($4,937,500) signals over-engineering and creates micro-negotiation. Always specify the dollar number; never specify a multiple (‘5x EBITDA’) because the EBITDA itself becomes the negotiation.

Cash-free / debt-free convention. Most LMM and sub-LMM deals use the cash-free / debt-free convention: the purchase price assumes the seller takes the cash on the balance sheet and pays off the debt. The deal then adjusts at close: cash on the balance sheet is added to the purchase price (paid to seller), debt is subtracted (paid off from purchase price). This avoids endless arguments about ‘what’s the right amount of cash and debt to assume.’ Specify cash-free / debt-free in the LOI.

Common seller counter-moves on price. Counter higher (always). Argue for a different EBITDA basis (push add-backs that increase reported EBITDA). Argue for a multiplier-based price (‘we want 5.5x rather than 5x’) — reject this; stay on dollar terms. Push for retention bonuses or transaction bonuses to seller’s employees (effectively increasing total payment). Push for a higher working capital target (effectively increasing cash to seller at close).

Working capital: the methodology AND the target dollar amount

Working capital is the second most important LOI section after price. It often determines 5-15% of total deal economics (cash-to-seller variation), and it’s the most common source of post-LOI surprise to first-time buyers who left it vague. Always specify both methodology AND target dollar amount.

Methodology options. TTM (trailing twelve months) average: most common for non-seasonal businesses, smooths month-to-month variation. 3-month average: useful when recent months are representative of go-forward operations. Same-month-prior-year: best for seasonal businesses (HVAC, agriculture, retail) where July’s working capital looks nothing like January’s. Hybrid: TTM with seasonal adjustments.

Target dollar amount. After choosing methodology, calculate the target dollar amount based on the seller’s historical financials. Example: ‘Working capital target: $850,000, calculated as the trailing twelve-month average working capital excluding cash and debt-like items.’ This number becomes the peg. Actual working capital below the peg means seller refunds the difference; actual above means buyer tops up.

Working capital line items. Specify what counts. Inclusions: trade receivables (net of bad-debt reserve), inventory (at lower of cost or market), prepaid expenses, trade payables, accrued expenses. Exclusions: cash and cash equivalents (covered separately as cash adjustment), debt and debt-like items (covered separately as debt adjustment), deferred revenue (often excluded as ‘liability that doesn’t represent operating obligation’), customer deposits, related-party balances, income taxes payable.

Dispute resolution. If buyer and seller disagree on working capital calculation post-close, the LOI should specify a mechanism: typically an independent accountant chosen by mutual agreement, with cost shared 50/50 or based on which party’s position prevails. Post-close working capital true-up typically happens 60-90 days after close, allowing time for full-month-end financial close and any retrospective adjustments.

Common seller pushback on working capital. Pushing for 3-month methodology when recent months are unusually strong (favoring seller). Pushing for higher target dollar amount than TTM justifies. Including typically-excluded items (deferred revenue, customer deposits) in working capital to inflate the target. Refusing to specify dispute resolution. Refusing to specify methodology entirely (leaves it for PSA negotiation, which favors the better-prepared party).

Earnout: when to include one and how to structure it

An earnout is a deferred payment contingent on the business hitting performance targets post-close. Buyers use earnouts to share post-close performance risk with the seller, reduce upfront cash, and create alignment through the transition. Sellers accept earnouts when the buyer’s anchored price is below their target but earnout potential closes the gap. Earnouts work best when the seller is staying involved post-close to influence the metric.

When to include an earnout. Customer concentration risk — earnout tied to customer retention. Recent rapid growth — earnout tied to confirmed growth continuation. Owner-dependent business — earnout creates seller incentive to ensure continuation. Pricing gap between buyer’s anchor and seller’s expectation — earnout bridges. Seller staying as consultant or operator post-close — earnout aligns. Avoid earnouts when the seller is fully exiting and won’t influence the metric (creates manipulation risk).

Sizing. 15-25% of total purchase price typical. Below 10% the earnout is too small to motivate the seller; above 25% the seller’s economic position becomes unbalanced. On a $5M deal, that’s $750K-$1.25M of earnout opportunity. Anchor in the LOI at the higher end (25%) and concede in PSA negotiation if needed.

Measurement metric. Revenue: cleanest, hardest for buyer to manipulate. Best for earnouts where customer retention is the main risk. Gross margin: clean, captures pricing power. Best for earnouts where margin protection matters more than top-line. EBITDA: most-manipulable, worst for sellers. Avoid for earnouts the buyer is likely to fight on. Adjusted EBITDA with specific add-back rules: middle ground — less manipulable than raw EBITDA but harder to administer than revenue.

Period and structure. 12 months: short, focused, good for revenue earnouts. 18-24 months: standard for most LMM earnouts. 36 months: longer-term, suitable for growth-thesis deals. Annual measurement vs cumulative end-of-period: annual incentivizes consistency; cumulative allows catch-up on weaker years. Caps and floors: cap on maximum earnout payment; floor below which no earnout pays. Tier structure: 100% earnout at target, 75% at threshold, 50% at minimum threshold.

Anti-manipulation language. The LOI should commit to anti-manipulation provisions in the PSA: requirement to operate the business in the ordinary course; restrictions on cost allocations from buyer’s other entities; requirement to provide seller with monthly financial statements during the earnout period; right to dispute calculations through independent accountant; specific carve-outs for actions that disrupt the metric (closing locations, terminating customer relationships, changing accounting methods).

Tax structure: asset, stock, or 338(h)(10)

Tax structure preference must be specified in the LOI. Without specification, the seller’s counsel will push for the seller-favorable structure (typically pure stock purchase) and the buyer loses 5-15% of after-tax economic value by the PSA stage. The structure decision drives both buyer-side (depreciation, basis step-up, liability protection) and seller-side (tax rate split between ordinary income and capital gains) economics.

Asset purchase: the buyer’s preference. Buyer purchases specific assets (equipment, inventory, AR, intangibles, goodwill) from seller. Seller retains liabilities not specifically assumed. Buyer establishes new tax basis equal to purchase price allocation (filed on IRS Form 8594). Buyer gets accelerated depreciation on equipment (Section 179, bonus depreciation) and 15-year straight-line on goodwill. Seller pays ordinary income tax on equipment and inventory recapture (up to 37% federal + state) and capital gains tax on goodwill (15-20% federal + state). Asset purchase is the LMM standard.

Stock purchase: the seller’s preference. Buyer purchases the stock (or LLC interests) of the operating entity. All assets and liabilities transfer automatically, including unknown liabilities. Buyer inherits the seller’s existing tax basis (no step-up). Seller pays long-term capital gains tax on the entire sale (typically more favorable than asset purchase split). For C-corp sellers, stock purchase avoids the double tax that occurs in C-corp asset sales. Stock purchase is the C-corp standard but creates inherited-liability risk for the buyer.

Section 338(h)(10) election: the bridge structure for S-corps. The 338(h)(10) election lets parties treat a stock purchase as an asset purchase for tax purposes. Required: target must be an S-corp or member of a consolidated group; both buyer and seller must agree; election must be filed timely with IRS within 8.5 months of close. Result: buyer gets the asset-purchase tax benefit (basis step-up); seller has the same federal tax treatment as a direct asset sale. The buyer typically pays a ‘gross-up’ of 5-10% of purchase price to compensate the seller for higher tax burden — commit to the gross-up in the LOI for S-corp targets.

Sample LOI tax structure language. ‘The transaction will be structured as an asset purchase under which Buyer will acquire substantially all assets of the Company free and clear of liabilities except those specifically assumed in the Definitive Agreement. If the Company is an S-corporation, the parties agree to make a Section 338(h)(10) election, with Buyer paying a gross-up to Seller equal to the incremental federal tax imposed on Seller as a result of the election versus a pure stock sale. Allocation of purchase price across asset categories shall be agreed by the parties consistent with reasonable IRS Form 8594 standards.’

Common seller pushback on tax structure. C-corp sellers will push for stock purchase to avoid double tax. S-corp sellers will push for stock purchase without 338(h)(10) (cleaner tax for them). LLC sellers (taxed as partnerships) typically accept asset purchase (no double tax issue). Counter-arguments: liability protection in asset purchase, depreciation step-up, 338(h)(10) gross-up to make seller whole. Don’t concede on tax structure; the economic value to the buyer is too significant.

Diligence period and exclusivity: the 60-90 day window

The diligence period and exclusivity period typically mirror each other. Both run 60-90 days from LOI signing. The diligence period is the buyer’s window to investigate the business; the exclusivity period is the seller’s commitment not to shop the deal. Misalignment between the two creates buyer-side risk — if exclusivity expires before diligence is complete, the seller is free to entertain competing offers.

Determining the right length. 60 days: tight but workable for clean deals with minimal regulatory complexity. 75 days: standard for LMM deals. 90 days: appropriate for larger deals, regulated industries, or deals requiring environmental Phase II or detailed customer/supplier interviews. 120 days: large deals with HSR filing requirements, complex tax structures, or known issues requiring extended remediation. Avoid 30-45 day periods; they’re too tight for adequate diligence.

Diligence scope specification. List the specific diligence components: financial Quality of Earnings, legal review, tax analysis, environmental Phase I (if applicable), HR / employee classification audit, IT review (if applicable), commercial / customer diligence, lease and real estate review. Specify the buyer’s diligence team (counsel, accountants, environmental consultant if applicable). Specify the seller’s commitments: providing access to records, making employees available for interviews, allowing customer/supplier interviews with reasonable notice.

Exclusivity language: explicit and specific. ‘During the Exclusivity Period, Seller and its representatives, advisors, and affiliates shall not (a) solicit, initiate, or encourage any inquiries or proposals from any party other than Buyer regarding a sale, merger, or other transaction involving the Company, (b) engage in or continue any negotiations with any party other than Buyer regarding such a transaction, or (c) provide any non-public information regarding the Company to any party other than Buyer for purposes of evaluating such a transaction. Seller shall promptly notify Buyer of any inquiry or proposal received from any third party during the Exclusivity Period.’

Exclusivity breach remedies. If the seller breaches exclusivity and signs with another buyer, what’s the remedy? Most LOIs cap damages at the buyer’s actual diligence costs ($25-100K). Some LOIs include ‘tail’ protections: if the seller closes with a buyer they were introduced to during exclusivity, the original buyer has rights to a portion of the alternative deal value. Specify clearly. Without specification, the seller’s breach of exclusivity becomes a damages dispute that may not be worth litigating.

Common seller pushback on exclusivity. Extending exclusivity from 60 to 90 days — sellers often try to shorten exclusivity duration. Loosening to ‘good faith’ exclusivity — this voids the protection; reject. Adding carve-outs for ‘unsolicited’ offers — reject; the seller’s existing investment banker may shop the deal under this language. Reducing exclusivity to less than the diligence period — reject; creates timing mismatch. Hold firm on hard exclusivity matching the full diligence period.

Conditions to closing: the buyer-side flexibility

Conditions to closing are the items that must be satisfied (or waived) before the deal funds. The LOI sets the framework; the PSA defines the specifics. Buyer-side conditions are typically broader; seller-side conditions are typically just receipt of purchase price. Common buyer-side conditions: accuracy of seller reps at close, no material adverse change, regulatory approvals if applicable, customer/lease consents, financing condition for SBA-financed buyers.

The financing condition: when to include. SBA-financed buyers must include a financing condition or risk default if SBA denies the loan. PE buyers with committed equity capital and pre-arranged senior debt typically don’t need a financing condition. Independent sponsors and search funders fall in the middle — financing condition is reasonable but expect seller pushback. Sample language: ‘Buyer’s obligation to close is conditioned on Buyer’s receipt of debt financing on the terms outlined in Section X. If such financing is not available on those terms, Buyer may terminate this LOI without further obligation.’

Material adverse change (MAC) language. MAC clause gives the buyer the right to walk if a material adverse change in the business occurs between LOI signing and close. Sample: ‘Buyer’s obligation to close is conditioned on the absence of any material adverse change in the business, financial condition, results of operations, or prospects of the Company between the signing of this LOI and Closing.’ Definitions of ‘material’ are typically left for the PSA, but courts generally require a 20%+ adverse impact on enterprise value to constitute a MAC.

Customer and lease consents. If material customer contracts or commercial leases require consent for assignment (most do), the buyer’s closing condition should include receipt of those consents. Specify the threshold: ‘consents from customers representing at least 75% of revenue.’ Some leases include change-of-control termination clauses that activate on stock purchases; pre-close negotiation with the landlord is critical.

Regulatory and HSR. Hart-Scott-Rodino Act requires pre-merger notification for deals above the size-of-transaction threshold ($119.5M as of 2025). Most LMM deals fall below the threshold but specify the condition: ‘Closing is conditioned on the expiration or earlier termination of any waiting period under the HSR Act, if applicable.’ State-specific approvals (liquor licenses, professional licenses, healthcare licenses) can take 60-180 days; build into close timeline.

Common seller pushback on closing conditions. Sellers will push to remove the financing condition (especially with SBA-financed buyers) — hold firm if you need it. Sellers will push for higher MAC threshold or more carve-outs to MAC — concede on minor carve-outs but hold the threshold. Sellers will push for shorter consent timelines on customers/leases — sometimes reasonable depending on circumstances. Sellers may push for break fees if buyer terminates — resist break fees in sub-$10M deals; concede on $10M+ deals if needed.

What to leave out of the LOI: keeping it short and effective

An LOI should be 2-5 pages, not 10-15. Longer LOIs invite seller redlines on every line and turn the LOI negotiation into a mini-PSA negotiation. Keep it tight. Specifically, leave the following items for the PSA: detailed representations and warranties; specific disclosure schedules; detailed indemnification language (cap and survival anchored in LOI; specific basket structure left for PSA); detailed closing condition mechanics (high-level conditions in LOI; specific implementation in PSA); employee retention agreements; customer notification protocols; transition services agreements; specific R&W insurance policy terms (commitment and cost-sharing in LOI; policy negotiation in PSA).

Items that are tempting to include but shouldn’t be. Specific representation lists: tempting to include ‘Seller represents that no litigation is pending’ — let the PSA handle this. Detailed indemnification baskets: anchor cap and survival in LOI; let PSA handle basket types and de minimis thresholds. Specific employee terms: leave for PSA. Customer-specific provisions: leave for PSA unless deal-critical (e.g., ‘top-customer multi-year contract is a closing condition’ belongs in LOI). Specific R&W insurance policy language: commit to R&W in LOI; negotiate policy in PSA.

When more detail is justified. Larger deals ($25M+ EV) often have longer LOIs because the financial stakes justify upfront precision. Highly regulated industries (healthcare, financial services) may include regulatory-specific provisions in the LOI. Deals with known specific issues (pending litigation, environmental remediation, sales tax exposure) may include specific issue treatment in the LOI to anchor the seller’s concession. For sub-$10M deals, default to brevity.

The ‘one-page test.’ If you removed all sections of your LOI except price, working capital, exclusivity, and tax structure, would the seller understand the deal? If yes, you’ve appropriately anchored. If no, you’ve over-stuffed the LOI. The other 9-12 sections protect process and confirm conventions, but the four anchors are price, working capital, exclusivity, and tax structure. Make sure those are crystal clear before adding additional detail.

The ‘walking-out test.’ Imagine you signed this LOI and then had to walk away from the deal in week 4 of diligence due to a discovered red flag. Are your remedies clear? Is your downside capped at known diligence costs? Can the seller pursue you for damages beyond your protected position? If yes to any of those concerns, tighten the termination and expense sections.

Common owner pushback and how to respond

After receiving your LOI, the seller (typically through their advisor) will respond within 5-15 days with a counter-position. The counter typically pushes back on 4-6 items: price (always), exclusivity (often), tax structure (sometimes), working capital (sometimes), earnout sizing (sometimes), close conditions (often). Each pushback has typical buyer-side responses.

Pushback: ‘Price is too low.’ Standard. Counter at 60-80% of the difference between your anchor and their counter. Reinforce why your anchor is justified (your DSCR math for SBA, your IRR target for sponsor, your platform synergy thesis for PE). If the seller’s counter is more than 15% above your anchor, you may have anchored too low — go up but not all the way. If the seller’s counter is more than 25% above your anchor, the bid-ask spread may be unbridgeable; consider walking before sinking diligence costs.

Pushback: ‘Extend exclusivity from 60 to 90 days.’ Sellers sometimes prefer shorter exclusivity to keep options. Hold firm on matching exclusivity to diligence period. If you’ve requested 75-day diligence, request 75-day exclusivity. The seller’s pushback often signals they’re not fully committed to your deal — verify they’re not running parallel processes.

Pushback: ‘Loosen exclusivity to good-faith exclusivity.’ ‘Good faith’ exclusivity is a contract drafting trick that voids exclusivity in practice — the seller can claim ‘we negotiated in good faith with you, but received an unsolicited offer we had to consider.’ Reject this language. Hold firm on hard exclusivity (‘Seller shall not solicit, accept, or negotiate other offers’).

Pushback: ‘Stock purchase, not asset purchase.’ Especially common from C-corp sellers (avoiding double tax) or S-corp sellers preferring pure stock treatment. Counter-arguments: liability protection in asset purchase (you don’t inherit unknown liabilities); depreciation step-up (significant economic value); 338(h)(10) gross-up commitment for S-corps (you’ll make the seller whole on the additional tax). For C-corps, consider stock purchase with detailed indemnification and R&W insurance instead of asset purchase.

Pushback: ‘Tighten close conditions; remove financing condition.’ Reasonable for buyers with committed capital. Unworkable for SBA buyers who need a financing exit if SBA denies. If you’re SBA-financed: hold firm on financing condition; offer to disclose the lender (Live Oak, Newtek, etc.) and pre-application status to demonstrate likelihood of approval. If you’re independently financed: consider concession with a small break fee ($25-100K) to give the seller comfort.

Pushback: ‘Higher working capital target.’ Sellers often push for working capital target above what TTM justifies, effectively increasing cash to seller at close. Hold firm on TTM-based methodology. Provide the seller’s CFO or accountant with the working capital calculation backup. If their alternate methodology is valid (truly seasonal business needing same-month-prior-year), concede on methodology but recalculate the target accordingly.

Conclusion

The Letter of Intent is the buyer’s leverage moment. Once signed, the seller is bound to exclusive negotiation for 60-90 days, the buyer has commitment, and the economic terms are anchored. Items not specified in the LOI become open battles in the PSA — and battles fought in the PSA cost the buyer 5-15% of deal economics. Anchor in the LOI: aggressive but reasonable price (5-10% above your true reservation), working capital methodology AND target dollar amount, earnout sizing and metric if applicable, indemnification cap and survival, R&W insurance commitment, tax structure preference (asset purchase or 338(h)(10) for S-corps), exclusivity period matching diligence period, financing condition if applicable. Leave for the PSA: representation language, disclosure schedules, specific closing condition mechanics, employee transition specifics, customer notification protocols. Hold firm against common seller pushback on exclusivity duration, exclusivity language (‘good faith’ kills it), and tax structure. Aggressive but reasonable LOIs from prepared buyers are signed in 14-21 days; sloppy LOIs from unprepared buyers are debated for 60+ days and often die before getting to diligence. And if you want to write LOIs to off-market sellers who already understand standard buyer-side conventions, we’re a buy-side partner that delivers proprietary, off-market deal flow to our 76+ buyer network — and the sellers don’t pay us, no contract required. For a deeper look, see our guide on purchase agreement or letter of intent which is right for you. For a deeper look, see our guide on letter of intent purchase business pdf template.

Frequently Asked Questions

What is a Letter of Intent in business acquisitions?

A Letter of Intent (LOI) is a 2-5 page document that transitions a business acquisition from informal conversation to formal process. It is non-binding for economic terms but binding for confidentiality and exclusivity. It anchors price, working capital methodology, earnout structure, indemnification cap, R&W insurance commitment, and tax structure preference, and commits the seller to a 60-90 day exclusivity period. For a deeper look, see our guide on loi meaning letter of intent business sale.

How long is a typical LOI?

2-5 pages with 13-15 standard sections. Longer LOIs (10-15 pages) invite seller redlines on every line and turn the LOI negotiation into a mini-PSA negotiation. Keep it tight: anchor key economic terms, defer specific representation and warranty language to the PSA.

What’s the difference between an LOI and a Purchase Agreement?

The LOI is non-binding (except for confidentiality and exclusivity), 2-5 pages, and anchors economic terms. The Purchase and Sale Agreement (PSA) is fully binding, 80-150 pages, and operationalizes the LOI through specific representations, warranties, indemnification mechanics, closing conditions, and disclosure schedules. The LOI sets the deal; the PSA executes it.

What sections must be in an LOI?

13-15 standard sections: header / parties / purchase price / purchase price adjustments (working capital methodology and target) / form of consideration / earnout if applicable / tax structure preference / diligence period / exclusivity period / conditions to closing / termination rights / confidentiality / treatment of expenses / governing law / non-binding language. Confidentiality, exclusivity, and expenses are typically the only binding sections.

How long should the exclusivity period be?

60-90 days typical, mirroring the diligence period. 60 days is tight but workable for clean deals; 75 days is standard for LMM deals; 90 days is appropriate for larger deals or those with regulatory complexity, environmental Phase II, or extensive customer interviews. Avoid 30-45 day periods (too tight for adequate diligence).

Should I include a financing condition in my LOI?

SBA-financed buyers must include a financing condition or risk default if SBA denies. PE buyers with committed equity capital typically don’t need one. Independent sponsors and search funders fall in the middle; financing condition is reasonable but expect seller pushback. Sample language: ‘Buyer’s obligation to close is conditioned on Buyer’s receipt of debt financing on commercially reasonable terms.’

What’s the right price to anchor in my LOI?

5-10% above your true reservation price. Calculate your reservation by building the deal model (DSCR for SBA, IRR target for sponsor, platform synergy math for PE). Anchor 5-10% above. The seller will counter higher; you’ll concede some in PSA negotiation. Round numbers signal confidence; decimal pricing signals over-engineering.

How do I specify working capital in the LOI?

Specify both methodology AND target dollar amount. Methodology: TTM (trailing twelve months) average for non-seasonal, 3-month for representative recent performance, same-month-prior-year for seasonal businesses. Target: calculated based on the chosen methodology applied to seller’s historical financials. Specify line items included/excluded and dispute resolution mechanism.

When should I include an earnout in my LOI?

When customer concentration risk needs mitigation. When recent rapid growth needs confirmation. When the seller is owner-dependent and staying involved post-close. When pricing gap between buyer and seller can be bridged. Avoid earnouts when the seller is fully exiting and won’t influence the metric. Sizing: 15-25% of total purchase price. Metric: revenue (cleanest) or gross margin; avoid EBITDA (most-manipulable).

What tax structure should I specify?

Asset purchase as buyer’s typical preference (liability protection, depreciation step-up). For S-corp targets, specify stock purchase with Section 338(h)(10) election and commit to a 5-10% gross-up to compensate seller for higher tax burden. For C-corp targets where 338 isn’t available, consider stock purchase with detailed indemnification and R&W insurance. LLC targets typically accept asset purchase.

How do I handle common seller pushback?

Hold firm on: hard exclusivity (no ‘good faith’ loophole), exclusivity duration matching diligence period, asset purchase preference, financing condition if SBA-financed, working capital methodology. Concede on: minor MAC carve-outs, reasonable consent timelines, employee retention specifics. Walk if: bid-ask spread exceeds 25%, seller refuses essential closing conditions, behavioral red flags accumulate.

What happens if the seller breaches exclusivity?

Most LOIs cap damages at the buyer’s actual diligence costs ($25-100K). Some LOIs include ‘tail’ protections: if the seller closes with a buyer they were introduced to during exclusivity, the original buyer has rights to a portion of the alternative deal value. Specify clearly in the LOI; without specification, breach becomes a damages dispute that may not be worth litigating.

How is CT Acquisitions different from a deal sourcer or a sell-side broker?

We’re a buy-side partner, not a deal sourcer flipping leads or a sell-side broker representing the seller. Deal sourcers typically charge buyers a finder’s fee on top of the deal and don’t curate quality. Sell-side brokers represent the seller, charge the seller 8-12% of the deal, and run auction processes that maximize seller proceeds at the buyer’s expense. We work directly with 76+ active buyers — search funders, family offices, lower middle-market PE, and strategic consolidators — and source proprietary off-market deal flow for them at no cost to the seller. The sellers don’t pay us, no contract is required, and we curate deals to fit each buyer’s specific buy box. You see vetted opportunities that aren’t on BizBuySell or Axial, with a buy-side advocate who knows both sides of the table.

Sources & References

All claims and figures in this analysis are sourced from the publicly available references below.

1. American Bar Association M&A Committee Deal Points Studies — Industry data on LOI structure conventions, exclusivity duration norms (60-90 days), and binding-vs-non-binding section conventions in private target M&A.
2. IRS Form 8594 (Asset Acquisition Statement) — Required filing for asset-purchase acquisitions; governs how purchase price is allocated across asset categories for tax purposes by both buyer and seller.
3. IRC Section 338(h)(10) Election Guidance — IRS Internal Revenue Manual section detailing 338(h)(10) election mechanics for S-corp targets, including timing requirements and tax treatment for buyer and seller.
4. Federal Trade Commission Hart-Scott-Rodino Act Thresholds (2025) — FTC guidance on HSR Act notification thresholds (size-of-transaction $119.5M as of 2025) for pre-merger antitrust review applicable to large M&A deals.
5. Delaware General Corporation Law (Reference for Governing Law) — Delaware corporate law commonly used as governing law in M&A LOIs and PSAs for institutional buyers and sellers due to extensive case law on contractual interpretation.
6. SBA Standard Operating Procedure 50 10 7.1 (Lender Loan Programs) — SBA SOP guidance on financing conditions appropriate for SBA 7(a)-backed acquisitions, including timing requirements and loan documentation standards relevant to LOI close-condition drafting.
7. Practical Law Corporate & Securities (Letter of Intent Resources) — Industry-standard LOI templates, exclusivity language, and binding-section conventions used by M&A counsel in private target transactions.
8. Stanford Graduate School of Business M&A Resources — Academic research on LOI conventions, exclusivity period mechanics, and the relationship between LOI specificity and deal close rates in private target M&A.