Signing a Letter of Intent is the moment a business acquisition becomes real. You've agreed on a price in principle, the seller has taken the business off the market, and both sides are committed to working toward a close. It feels like the hard part is over.
It isn't. The LOI is where the deal gets built — and the terms you agree to in it will shape every negotiation, every due diligence conversation, and every closing condition that follows. Buyers who treat the LOI as a formality and sign quickly are the same buyers who find themselves renegotiating from a weakened position three weeks later.
This guide walks through every major LOI component, what to watch for in each, and how the LOI connects directly to your due diligence process.
What an LOI is — and what it isn't
A Letter of Intent is a non-binding agreement (with a few important exceptions) that sets out the proposed terms of a business acquisition. It's typically 3–8 pages and covers purchase price, deal structure, due diligence timeline, exclusivity, and the conditions under which either party can walk away.
"Non-binding" means neither party is legally obligated to close — but it doesn't mean the LOI has no teeth. The exclusivity provision is binding. Confidentiality obligations are binding. And while you can walk away after signing, doing so repeatedly or without cause creates reputational consequences in the deal community that matter if you're a serious buyer.
Think of the LOI as the architectural blueprint. The purchase agreement is the legal structure built on top of it. What you put in the blueprint constrains what you can build.
The key LOI components — what to look for in each
Purchase price and consideration structure
The headline number is obvious — but the structure of the consideration is where things get interesting. Purchase price in a small business deal is rarely "cash at close." It's typically a combination of:
- Cash at close — the portion paid on closing day, often funded by equity and SBA financing
- Seller note — a portion of the purchase price the seller carries as debt, repaid by the buyer post-close, typically over 3–7 years at 5–8% interest
- Earnout — contingent consideration paid if the business hits specified performance targets post-close
- Equity rollover — seller retains a minority stake in the acquired business (less common in small business deals)
When reviewing the consideration structure, ask: what is the seller actually receiving at close vs. over time? A $1.2M deal that includes a $300K seller note and a $150K earnout is a very different economic arrangement than $1.2M cash at close — for both parties.
The purchase price in the LOI is typically based on the seller's represented adjusted earnings. If your QoE report verifies lower earnings, you'll need to renegotiate this number — and the LOI's terms determine how much leverage you have to do so. An LOI that doesn't include clear due diligence contingencies can make post-QoE renegotiation much harder.
Deal structure: asset sale vs. entity sale
This is one of the most consequential structural decisions in any acquisition, and it needs to be addressed in the LOI.
In an asset sale, you're buying the business's assets — equipment, inventory, contracts, goodwill, trade name — without acquiring the legal entity itself. You get a clean start: no inherited liabilities, no unknown claims against the old entity, and a step-up in asset basis that can provide significant tax benefits.
In an entity sale (stock or membership interest purchase), you're buying the entity itself — including its history, its liabilities, and any claims that might surface later. Buyers typically prefer asset sales; sellers often prefer entity sales for tax reasons. This is a negotiating point, and how it's resolved in the LOI will have meaningful tax and liability implications for both sides.
Due diligence period and conditions
The LOI defines how long you have to conduct due diligence — typically 30–60 days — and the conditions under which you can terminate the deal based on due diligence findings. This section deserves careful attention.
What you want: a due diligence contingency that allows you to terminate if findings are materially adverse to the representations made by the seller — with "materially adverse" defined broadly enough to include QoE findings that reduce verified earnings below a threshold.
What to watch for: LOIs that give you a short due diligence window (less than 30 days) without the ability to extend, or that define the termination right narrowly in ways that make it hard to exit on QoE grounds. A 21-day due diligence window isn't enough time to commission and receive a quality QoE report — don't sign an LOI that doesn't give you adequate runway.
Exclusivity period
The exclusivity provision is the most reliably binding part of an LOI. Once you sign, the seller agrees not to solicit or entertain offers from other buyers for the duration of the exclusivity period — typically 30–60 days, sometimes longer.
For buyers, exclusivity is valuable: it gives you the time and confidence to invest in due diligence without fear that the seller is simultaneously negotiating with three other parties. For sellers, it's a significant concession — they're taking the business off the market and betting on you.
Watch the duration: 30 days of exclusivity with a 30-day due diligence period leaves almost no buffer. Any QoE delay, document collection problem, or discovery that requires additional investigation will push you past the exclusivity window — giving the seller grounds to reopen the process. Request 45–60 days minimum if a QoE report is part of your plan.
Working capital treatment
As we covered in Post 18, working capital is one of the most frequently disputed elements of a small business close. The LOI is where the framework for resolving that dispute gets established — or not.
A well-structured LOI includes: a statement that the deal is on a cash-free, debt-free basis with a normalized level of working capital included, a reference to how the working capital target will be defined (typically trailing 12-month average), and a mechanism for post-close adjustment if actual working capital differs from target.
An LOI that's silent on working capital is an invitation to a dispute at closing. Raise it explicitly before you sign.
Seller transition and non-compete
The LOI should address what happens after close with respect to the seller: how long they'll stay to transition the business (typically 3–12 months), in what capacity (employee, consultant, advisor), and whether they're restricted from competing post-close.
Non-compete provisions in small business deals are both common and important. A seller who immediately goes back to customers with a new competing entity can erase much of the goodwill you just paid for. The LOI should establish the framework — geographic scope, duration (typically 2–5 years), and the activities prohibited — with the final details formalized in the purchase agreement.
Conditions to close
The LOI should specify what needs to happen for the deal to close: satisfactory completion of due diligence, financing approval (if applicable), third-party consents (landlord, key contracts), regulatory approvals if any, and key employee retention agreements. Each of these is a potential closing condition that needs to be met — and a potential out if it isn't.
What the LOI doesn't cover — and why that matters
The LOI sets the framework; the purchase agreement fills in the legal detail. Many of the most important buyer protections — representations and warranties, indemnification provisions, escrow arrangements, and specific closing adjustments — aren't typically spelled out in the LOI. They'll be negotiated in the purchase agreement phase, informed by what the QoE report found.
This is why the sequence matters: LOI first, QoE report during due diligence, purchase agreement last. The LOI gets you exclusivity. The QoE report tells you what you're buying. The purchase agreement protects you based on what you found.
Getting your LOI reviewed before you sign
Every LOI on a deal over $500,000 should be reviewed by a transaction attorney before you sign — not a general practice attorney, a lawyer who works on business acquisitions regularly. The cost is typically $500–$1,500 for LOI review, and the most important protections (due diligence contingencies, working capital language, deal structure) need to be in place before exclusivity locks you in.
It's far easier to add language to an LOI before signing than to renegotiate it after the seller has accepted your exclusivity and stopped talking to other buyers.
LOI signed — now what? The moment your LOI is executed is when you should commission your QoE report. ClearView QoE delivers CPA-reviewed reports in 10 business days — giving you verified financials before your due diligence window closes. Get started immediately →