What Is an LOI? An Introductory Guide for Business Owners

An LOI — short for Letter of Intent — is the document that formalizes a proposed business sale before the lawyers spend $80k-$200k drafting the definitive purchase agreement. It’s the bridge between ‘the buyer is interested’ and ‘the buyer has agreed to a binding contract.’ The LOI lays out the proposed price, the deal structure, the timeline, and the conditions both parties need to satisfy in order to close.

Most of the LOI is non-binding. The headline price, the working capital target, the earnout structure — all proposals subject to diligence findings. The buyer can revise these terms downward after looking at the books. The seller can refuse the revisions and walk. Neither side is contractually committed to the headline numbers.

Two clauses inside an LOI are typically binding the moment you sign. Exclusivity (a no-shop clause that locks the seller into one buyer for 60-120 days) and confidentiality (a mutual obligation to keep deal terms and diligence findings private). These clauses have real legal force and survive even if the deal doesn’t close.

Signing an LOI is a meaningful commitment of time and leverage. Once the LOI is signed, the seller has effectively taken the business off the market for the duration of the exclusivity period. The buyer’s diligence team gets full access. The seller’s management team commits substantial time. If the deal breaks, both sides eat their costs and the seller restarts a process that may take 60-120 more days. Understanding the LOI is the first step in managing your sale process well.

“An LOI is the cheap way to find out if a deal will work. If price, structure, and timeline don’t fit in the LOI, they certainly won’t fit in the $80k purchase agreement that comes next.”

Key Takeaways

• An LOI is the standard pre-contract document in M&A. Most buyers and sellers in the lower-middle market sign an LOI 30-60 days into the sale process.
• Nine essential terms appear in nearly every LOI: price, structure, consideration, working capital, earnout, exclusivity, confidentiality, conditions, expense allocation.
• Most LOI clauses are non-binding (subject to diligence). Exclusivity and confidentiality are binding the moment you sign.
• Pre-LOI process: marketing, CIM distribution, IOIs from multiple buyers, management meetings, bid selection. Usually 30-60 days.
• Post-LOI process: diligence, DPA drafting, signing, close. Usually 60-120 days from LOI to wire.
• Roughly 70-80% of signed LOIs close in the lower-middle market. The other 20-30% break due to diligence, financing, or strategic changes.

What is an LOI in a business sale?

An LOI is a written proposal from a buyer to a seller that outlines the major terms of a contemplated acquisition. It’s typically 4-8 pages, written in plain English, and structured as a numbered list of key deal terms. The LOI is signed by both buyer and seller to formalize their agreement to proceed under the proposed framework, even though most of the framework is non-binding.

An LOI is not the same as a Definitive Purchase Agreement (DPA). The DPA is the binding 80-150 page contract that actually transfers the business at closing. The LOI is the high-level proposal that sets the framework for the DPA. Think of the LOI as the blueprint and the DPA as the building — you wouldn’t spend $200k on a building without first agreeing on the blueprint.

LOIs are signed after preliminary buyer evaluation. Before the LOI, buyers receive the Confidential Information Memorandum (CIM), review high-level financials, hold management meetings, and submit indications of interest (IOIs). The seller compares bids and picks the buyer they want to negotiate with. The LOI is the formalization of that selection.

An LOI is the cheap way to find out if a deal will work. Drafting a Definitive Purchase Agreement costs $80k-$200k in legal fees. Drafting an LOI costs a fraction of that. If the price and structure don’t work in the LOI, they certainly won’t work in the DPA — so the LOI is where buyers and sellers test alignment before committing serious legal spend.

The 9 essential terms in every LOI

Term 1: Purchase price. The headline number. Sometimes a fixed dollar amount ($10M). Sometimes a formula (6.5x trailing twelve months Adjusted EBITDA). Sometimes a range ($9-11M depending on QoE results). Sellers should push for fixed dollar numbers; formulas give buyers room to lower the price during diligence.

Term 2: Deal structure (asset sale vs. stock sale). Asset sale: buyer purchases the company’s assets but not the legal entity. Step-up in basis for buyer; usually higher tax burden for seller. Stock sale: buyer purchases the equity (stock or membership interests) of the company. Lower tax burden for seller; buyer inherits all liabilities. The LOI should specify which structure is contemplated.

Term 3: Form of consideration. How the price is paid. 100% cash at close is rare in lower-middle market. Most deals are mix: cash + rollover equity + seller note + earnout. The LOI should break down each component (e.g., ‘$7M cash + $1.5M rollover + $1M seller note + $500k earnout’).

Term 4: Working capital target. The amount of working capital (current assets minus current liabilities) the seller is required to deliver at close. Below the target, the price drops dollar-for-dollar; above the target, the price rises. The LOI should specify the target amount or the methodology (typically 12-month average).

Term 5: Earnout (if any). Contingent payment based on post-close performance. Common when buyer and seller can’t agree on price. The LOI should outline: earnout amount, performance metric (revenue, EBITDA, gross profit), measurement period (12-36 months typical), and payment timing.

Term 6: Exclusivity. The seller agrees not to negotiate with other buyers for a specified period (60-120 days). This is binding. Sellers should push for shorter periods (45-75 days) and automatic termination triggers (e.g., if buyer doesn’t deliver financing letter by Day 30).

Term 7: Confidentiality. Both parties agree to keep deal terms and diligence findings private. Survives the LOI termination. Typically extends 2-3 years after termination. This is binding.

Term 8: Conditions to close. Key requirements for the deal to actually close: financing approval, third-party consents (landlord, key customer), regulatory approval, no material adverse change. The LOI should list these conditions so both parties know what could derail the deal.

Term 9: Expense allocation. Who pays what if the deal breaks. Default: each party pays their own legal and advisory fees. Some LOIs include break fees (one party pays the other a fixed amount if they walk without cause). Sellers should resist break fees that favor the buyer.

Pre-LOI: how a buyer earns the right to send you an LOI

The pre-LOI process starts with buyer outreach. Your advisor (investment banker or M&A advisor) markets the business to a curated list of qualified buyers. This typically means 30-100 PE firms, strategic buyers, search funders, and family offices. Each buyer signs an NDA and receives the Confidential Information Memorandum (CIM).

Buyers review the CIM and submit Indications of Interest. An IOI is a 1-2 page preliminary bid: price range, structure, financing approach, timeline. Buyers don’t commit to anything at this stage — they’re indicating interest, not making firm offers. The seller and advisor compare IOIs and shortlist 3-6 buyers for management meetings.

Management meetings happen 30-45 days into the process. The seller (or CEO) presents the business in detail to shortlisted buyers. Each buyer typically gets a 3-4 hour meeting plus a tour. After meetings, the seller asks buyers to submit revised bids reflecting what they learned. Top buyers refine their IOIs into LOIs.

The seller picks one buyer to receive exclusivity. After comparing revised bids and management meeting impressions, the seller selects one buyer to negotiate the LOI. Sometimes the highest-priced bidder wins. Often, fit, certainty of close, and structure matter more than headline price. The LOI is signed 45-60 days into the sale process.

Post-LOI: what happens during the 60-120 days to close

Day 1-5: deal team mobilization. The buyer’s deal team mobilizes immediately. Financial DD (Quality of Earnings provider) gets engaged. Legal DD team starts reviewing contracts in the data room. Operational DD (often industry consultants) get briefed. The seller’s advisor coordinates diligence requests and protects management bandwidth.

Day 10-45: financial diligence and QoE. Quality of Earnings analysis takes 30-45 days. Auditors test revenue recognition, validate Adjusted EBITDA, examine working capital, identify debt-like items. The QoE report often surfaces issues that lead to retrade discussions: aggressive add-backs, customer concentration, working capital normalization.

Day 30-75: legal diligence and DPA drafting. Lawyers review every material contract: customer agreements, vendor contracts, leases, employment agreements, IP assignments. Draft DPA usually circulates by Day 45-60. Negotiation of the DPA (representations, warranties, indemnification, escrow) takes another 30-45 days.

Day 75-120: signing and closing. Final DPA signed. Buyer obtains final financing commitment. Third-party consents collected. Regulatory approvals (HSR for larger deals) finalized. Wire transfers executed at closing. The seller receives cash, rollover equity, seller notes, and signs over the business.

What’s binding in an LOI — and what’s not

The commercial terms are non-binding by design. Price, deal structure, working capital target, earnout terms, escrow size — all proposals subject to diligence. The buyer is free to revise downward if diligence reveals customer concentration, owner dependency, or weaker-than-claimed Adjusted EBITDA. The seller is free to refuse revisions and walk.

Exclusivity is binding and enforceable. When you sign an LOI with a 90-day exclusivity clause, you’ve made a contractual promise: no negotiation with other buyers, no provision of diligence materials to third parties, no soliciting competing bids. Breach can result in damages or specific performance lawsuits. The exclusivity clause is what makes the LOI ‘real.’

Confidentiality survives the LOI. Even if the deal blows up at Day 90, the failed buyer can’t share what they learned. Customer lists, financial data, employee information — all confidential. Confidentiality typically extends 2-3 years past termination. Most LOIs reference an existing NDA signed during the marketing phase.

Watch for binding clauses hidden in non-binding sections. Some LOIs have a sentence at the bottom: ‘Sections 4, 5, 7, 9, and 11 of this letter are intended to be binding.’ Make sure you know which sections those are. If anything is unclear, ask your M&A attorney to translate. Never sign an LOI without legal review.

Why exclusivity matters more than price

Exclusivity removes your leverage. Once you sign a 90-day exclusivity clause, you can’t respond to inbound inquiries. You can’t solicit competing bids. You can’t even mention the deal to third parties. If the buyer retrades the price during diligence, you can’t threaten to go to another buyer — because you can’t.

Buyers know this and use it. It’s an open practice in M&A: some buyers sign aggressive high-priced LOIs to win exclusivity, then retrade during diligence. Common excuses: customer concentration, unrecorded liabilities, working capital surprises. By the time the seller realizes the price is dropping, exclusivity prevents them from going back to other buyers.

Negotiate exclusivity carefully. Push for 45-75 days instead of 90-120. Add automatic termination triggers: financing commitment letter by Day 30, DPA draft by Day 45, no material adverse change in buyer financing. Insert a ‘no retrade’ clause: if the buyer materially lowers the price, exclusivity terminates immediately.

Sellers with multiple bidders have leverage. If you have 3-5 qualified buyers willing to sign LOIs, you can demand tighter exclusivity terms. Buyers who refuse aggressive exclusivity language usually have weak conviction in their bid. The buyers who agree to short, conditional exclusivity are typically the most serious.

How to negotiate an LOI before you sign

Negotiate the price breakdown, not just the headline. A $10M LOI with $3M earnout, $1M seller note, and $1.5M rollover equity gives the seller $4.5M cash at close. A $9M all-cash deal gives $9M cash at close. The headline number means little without the breakdown. Push for as much cash at close as possible.

Negotiate exclusivity hard. Push for 60 days. Insist on automatic termination if buyer misses milestones. Add a ‘no retrade’ clause. Reserve the right to terminate if the buyer materially changes terms. Most buyers will fight back — that’s why this is a negotiation, not a signing.

Negotiate working capital target before signing. Working capital is the silent killer. A $500k working capital adjustment can swing the price by $500k. Push for clarity in the LOI: target amount, methodology (12-month average), and definition of working capital (which accounts are included). Don’t leave this for the DPA negotiation.

Negotiate earnout structure carefully. Earnouts are where deals go to die. Push for: revenue-based metrics (less manipulable than EBITDA), short measurement periods (12-24 months), seller protections against post-close changes that hurt earnout achievement. If the LOI is vague on earnout, demand specifics before you sign.

Common mistakes sellers make with LOIs

Mistake 1: Signing without legal review. Even though most of the LOI is non-binding, the binding clauses (exclusivity, confidentiality) have real legal force. An M&A attorney review costs $2,000-$5,000 and can catch hidden binding language, weak protections, and trap clauses. Never sign without legal review.

Mistake 2: Accepting the first LOI without comparing alternatives. If you only have one bidder, you have no leverage. Run a real process with multiple buyers. Compare LOIs side by side. The buyer who knows they’re competing will give you better terms than the buyer who knows they’re the only option.

Mistake 3: Focusing on headline price instead of structure. Sellers fixate on the headline number and ignore the structure. A $10M LOI can be: $10M cash, or $7M cash + $3M earnout, or $5M cash + $3M rollover + $2M seller note. The cash at close varies dramatically. Focus on cash, certainty, and post-close obligations — not the headline.

Mistake 4: Underestimating diligence intensity. Many sellers think diligence will be a few document requests and a couple of meetings. In reality, lower-middle market diligence involves 200-500 document requests, 20-50 management interviews, customer reference calls, and 60-90 days of intense work for the seller’s team. Plan for it before you sign.

Conclusion

An LOI is the structured proposal that turns a buyer’s interest into a 60-120 day path to close. It’s mostly non-binding (price and structure are subject to diligence) but binding on the two clauses that matter most: exclusivity and confidentiality. Signing an LOI commits you to one buyer for 2-4 months, takes the business off the market, and exposes you to the buyer’s diligence team. The nine essential terms (price, structure, consideration, working capital, earnout, exclusivity, confidentiality, conditions, expense allocation) all matter. Negotiate each one before you sign. Run a real process with multiple bidders. Have an M&A attorney review the LOI. Push for short, conditional exclusivity. And remember: the LOI is the cheap way to find out if a deal will work — if it doesn’t fit at this stage, it won’t fit at the $200k DPA stage either.

Frequently Asked Questions

What is an LOI?

An LOI (Letter of Intent) is a 4-8 page document that outlines the proposed terms of a business acquisition before the lawyers draft the binding purchase agreement. It’s the standard pre-contract document in M&A.

Is an LOI legally binding?

Most of the LOI is non-binding (price, structure, earnout). Two clauses are typically binding: exclusivity (no-shop) and confidentiality. Some LOIs include binding break fees or expense allocation. Read every clause labeled ‘binding’ carefully.

When is an LOI signed in a business sale?

30-60 days into the sale process, after the seller has marketed the business, received indications of interest from multiple buyers, held management meetings, and selected a winning bidder.

What are the 9 essential terms in an LOI?

Purchase price, deal structure (asset vs. stock), form of consideration (cash, rollover, seller note, earnout), working capital target, earnout terms (if any), exclusivity period, confidentiality, conditions to close, and expense allocation.

How long is the exclusivity period in an LOI?

60-120 days, with 90 days being most common. Sellers should push for 45-75 days and insist on automatic termination triggers if the buyer misses milestones.

What happens after I sign an LOI?

Diligence kicks off. The buyer’s deal team mobilizes within days. QoE work begins. Lawyers start drafting the Definitive Purchase Agreement. Total timeline from LOI to close: 60-120 days.

Can the buyer lower the price after I sign the LOI?

Yes, this is called ‘retrading.’ The buyer can revise commercial terms downward based on diligence findings. The seller can refuse and walk. But during the exclusivity period, the seller can’t go to other buyers, which limits leverage.

What’s the difference between an IOI and an LOI?

An IOI (Indication of Interest) is a 1-2 page preliminary bid submitted by multiple buyers during the marketing phase. An LOI (Letter of Intent) is a 4-8 page formal proposal signed by one buyer after the seller picks them as the winning bidder. IOIs come first; LOIs come later.

How much does an LOI cost to draft?

Buyer-side: $5,000-$15,000 in legal fees. Seller-side review: $2,000-$5,000. Compare to a Definitive Purchase Agreement, which costs $50,000-$200,000+ to draft and negotiate.

What percentage of LOIs actually close?

Roughly 70-80% in the lower-middle market. The 20-30% that break do so because of diligence findings, financing falls through, market changes, or seller loses confidence in the buyer.

Can I sign an LOI with multiple buyers?

Almost never. Standard LOIs include exclusivity clauses that prevent the seller from negotiating with other buyers during the exclusivity period. The whole point of exclusivity is to give one buyer the runway to do diligence without competition.

Do I need an M&A advisor to negotiate an LOI?

Strongly recommended. An experienced advisor knows market terms for exclusivity periods, working capital methodology, earnout structures, and break fees. Without an advisor, sellers often accept buyer-favorable terms that cost them $250k-$1M+ over the deal.

About the Author

Christoph Totter is the founder of CT Acquisitions, a buy-side deal origination firm headquartered in Sheridan, Wyoming. CT Acquisitions sources founder-led businesses for 75+ private equity firms, family offices, and search funds across the U.S. lower middle market ($1M–$25M EBITDA). Christoph writes about M&A from the perspective of someone on the phone with both sides of the deal table every week. Connect on LinkedIn · Get in touch