How to Review a Letter of Intent When Selling Your Business

How Do You Review a Letter of Intent When Selling Your Business?

A letter of intent is not the finish line. It is the starting gun for the hardest stretch of any deal.

When a buyer sends you an LOI, it means they're serious. It means they've looked at your business, vetted the financials, and decided they want to own it. That feels good. It should. Getting to LOI matters. The problem is what happens next.

I've handled 75-plus transactions. I have watched sellers make critical mistakes in the hours after receiving an LOI because they didn't understand what they were looking at. They either signed too fast, excited by the headline number, or they got scared off by legal language that is completely standard. Both are equally dangerous.

Here is how to read an LOI without either of those mistakes.

Table of Contents

1. What a Letter of Intent Is
2. The Most Important Sections in Any LOI
3. Exclusivity: The Clause That Changes Everything
4. Deal Structure: Cash, Notes, Earnouts, and SBA
5. What Happens After You Sign
6. Common LOI Mistakes Sellers Make
7. FAQ: Letters of Intent for Business Sellers

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What a Letter of Intent Is

An LOI is a general statement of intent. Non-binding, mostly. It sets the terms that both sides agree to pursue in good faith as they move toward a final purchase agreement.

Before an LOI gets signed, a lot has already happened. The buyer has signed an NDA. They've received and reviewed your CIM (Confidential Information Memorandum). They've had at least one call with you. They've assessed their financing capability. They've confirmed strategic fit. By the time an LOI arrives, the buyer has already decided they want to buy.

What they haven't decided is the final price or terms. That gets worked out in the asset or stock purchase agreement that follows. The LOI is the map. The purchase agreement is the territory.

Here's what makes LOIs complicated for sellers: most of the document is non-binding. That means either side can walk away. But not all of it. Two sections carry real legal weight, and sellers miss them constantly.

Section 1: Access and due diligence. Once you sign, you're granting the buyer's team access to your books, your contracts, your records, and potentially your customers and vendors. That access is legally binding from the moment you execute.

Section 2: Exclusivity. When you sign an LOI with a no-shop clause, you are legally required to stop marketing your business to other buyers for the duration of that exclusivity window. That binding commitment is where most seller optionality evaporates.

Everything else is negotiable. The headline price is a starting point. The deal structure gets refined. Due diligence can surface adjustments. But exclusivity is real the moment the ink dries.

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The Most Important Sections in Any LOI

Let me walk through the sections that matter, because I've watched deals get stuck on things that should be resolved before anyone signs.

Purchase price and consideration. This is the headline number. When you read it, look for two things: how the total price is broken down (down payment versus financed amount versus earnout) and what's going in escrow. It is extremely common for 5 to 10 percent of the purchase price to be held in escrow post-closing, often for 12 months. That is buyer protection against undisclosed liabilities. It's not a negotiating tactic. It's standard. If you're selling a business for $5 million, expect $250,000 to $500,000 held in escrow for a year.

Defined terms. Legal documents run on defined terms. In an LOI, the "Purchaser" is a specific entity, often an acquisition company set up for the deal, not the individual you've been talking to. The "Transaction" has a specific meaning. The "Closing" has a specific meaning. When you see capitalized words, they refer to exactly what the document defines them as. Read the definitions section carefully.

Purchase agreement conditions. The LOI says both parties will negotiate toward a definitive asset or stock purchase agreement. It also says that agreement will supersede the LOI entirely. That's normal. It means the LOI is a handshake on intent; the final purchase agreement is what controls the deal.

Closing adjustment. Almost every LOI includes a provision that the purchase price "shall be adjusted" if the due diligence reveals financials that are inconsistent with what was represented. The word "shall" in a legal document means must. This is not optional language. It means the buyer has the right to renegotiate if they find something that doesn't match. The cleaner your books, the less exposure you have here.

Conditions to closing. The deal only happens if certain conditions are met. Typically: the buyer is satisfied with due diligence, no material adverse change has occurred in the business, regulatory approvals are secured if applicable, and financing is confirmed. Each of those is a potential exit point for the buyer. Understand them before you sign.

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Exclusivity: The Clause That Changes Everything

This is the section that sellers underestimate more than any other.

An exclusivity or no-shop clause prevents you from showing your business to other buyers, accepting other LOIs, or continuing any other sale discussions for a defined period. Thirty to 60 days is typical. The intent is to give the buyer time to complete due diligence and negotiate a purchase agreement without worrying that you'll take another offer.

That sounds reasonable. And it is, for a buyer. For a seller, it is the most significant transfer of optionality in the entire process.

Here's why. Before you sign, you have options. Multiple buyers are potentially interested. The buyer sitting across from you knows that. That reality is what keeps them from lowballing you or adding aggressive terms. The moment you sign exclusivity, you have one buyer. They know it. The balance of power shifts.

This is exactly why I coach every seller I work with to generate competing offers before signing any exclusivity clause. Not to be difficult. Not to be aggressive. Because competition is the only thing that keeps a buyer honest through a process that will take months.

I've had sellers who came to me after signing exclusivity with a single buyer and then watched that buyer use the due diligence period to grind the price down. I call it retrading. It's more common than people think, and it almost always happens when a seller has no backup offer to walk toward.

Before you sign: make sure you understand how long the exclusivity window is. Get it as short as possible. Thirty days is better than 60. Some deals will include earnest money from the buyer in exchange for exclusivity, especially on larger transactions. I've seen earnest deposits as high as $250,000 on acquisitions where the buyer is asking for an extended no-shop period. That's appropriate. If a buyer wants you off the market, they should have some skin in the game.

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Deal Structure: Cash, Notes, Earnouts, and SBA

The price is what the headline says. How you get paid is the real story.

Most business sellers want 100 percent cash at closing. Most buyers want 100 percent financing. Reality lands somewhere in between. Here's how the pieces fit together.

All-cash deals. A buyer brings their own capital, no bank involvement, and closes clean. This is the fastest and cleanest structure. It also gives sellers the most certainty. The downside is the buyer pool is smaller. True all-cash buyers at $5 million-plus are not common.

SBA financing. For deals under $5 million, SBA 7(a) financing is the dominant structure. The bank lends 80 percent of the deal value; the buyer brings 20 percent down. To qualify, your business needs at least two to three years of tax returns showing consistent profit. The SBA's underwriting caps the loan at roughly 5x SDE, which means your financials need to support the price you're asking. If the bank can't underwrite it, the deal dies, regardless of what the LOI says.

Important for sellers: if you're going to market with SBA buyers, your books need to be in accrual accounting (not cash basis), and your tax returns need to tell the same story as your P&L. SBA lenders are asking buyers to bet their house on your business. They're careful.

Seller notes. A portion of the price, typically 10 to 30 percent, is paid by the buyer over 2 to 5 years after closing. Seller notes are not unusual and are sometimes required to bridge a gap between what SBA will lend and the agreed purchase price. They do introduce post-close risk for sellers. If the buyer runs the business poorly after you leave, repayment gets complicated. I coach sellers to minimize seller notes through competition, not negotiation.

Earnouts. A portion of the price is tied to future performance. If the business hits a revenue or profit target after closing, you get additional payments. Earnouts are the option of last resort. They only happen when the buyer doesn't fully believe the seller's projections, and they put the seller in the position of depending on the buyer to operate well after close. The way to avoid earnouts is to have multiple buyers competing. Competition makes buyers stretch on day-one certainty rather than hedge with post-close contingencies.

Escrow. This is not part of the purchase price structure so much as post-close protection. A percentage of the price gets held by an escrow agent for a defined period, often a year, to cover any claims that emerge after closing that weren't identified in diligence. At 10 percent of $5 million, that's $500,000 sitting in escrow for a year. Understand this going in.

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What Happens After You Sign

The moment you sign an LOI, the clock starts and momentum becomes the most important variable in the deal.

I've said this before and I'll say it again: momentum protects deals. I have watched more deals break in the 60 to 90 days after LOI than in any other phase of the process. Not because the businesses weren't good. Because momentum stalled, diligence dragged, someone got scared, and the deal lost its energy.

Here is what the post-LOI timeline looks like.

Due diligence. The buyer's team gets full access to your books, contracts, vendor relationships, tax returns, and operational records. Typically 2 to 4 weeks. If you haven't gone through what due diligence involves as a seller, that post breaks it down in full. The buyer may also engage their accountants, tech consultants, and attorneys to review specific areas. One important rule: you should be available and responsive throughout this period. Sellers who go quiet during diligence lose deals. Every unanswered request adds delay and doubt.

Purchase agreement negotiation. This is where attorneys get involved on both sides. The asset or stock purchase agreement is the binding document that supersedes the LOI. It gets negotiated in parallel with or shortly after diligence. This is the longest legal phase: 3 to 6 weeks best case, longer if either side has complex legal teams or complicated corporate structures. I always recommend sellers use a fixed-fee transaction attorney, not hourly. Hourly attorneys have no incentive to close fast.

Financing and closing. If SBA financing is involved, add 4 to 6 weeks for bank underwriting, appraisal, and approval. Cash deals can close significantly faster. On a simple online business with no inventory and no SBA requirement, I've moved from signed LOI to wire in 61 days. That is not average. Average is 90 to 120 days.

One thing sellers always forget. The business needs to keep performing during this entire window. I cannot overstate this. One of the most common deal killers is a seller who takes their foot off the gas the moment an LOI arrives. Revenue dips during diligence, buyer gets nervous, retrade happens. Keep running the business like the deal hasn't happened yet. Because until the wire hits, it hasn't.

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Common LOI Mistakes Sellers Make

After closing over 75 transactions, I've seen the same mistakes repeat. Here are the ones that cost sellers the most.

Reading only the headline number. The total purchase price is the first thing every seller looks at. It should be the second thing. Read the deal structure first. A $5 million deal that's $3 million cash at closing with $1 million seller note and $1 million earnout is very different from a $5 million all-cash close. The headline says the same thing. The structure does not.

Signing exclusivity too quickly. The buyer needs exclusivity to do diligence. You need time to evaluate whether this buyer is the right one. Don't let excitement about the LOI rush you into signing a no-shop before your attorney has reviewed the terms. If the buyer is legitimate, they'll wait 48 hours for your counsel to review.

Getting scared by standard legal language. LOIs contain sections about warranties, representations, material adverse changes, arbitration, and escrow. None of that is aggressive. All of it is standard. I've watched sellers get spooked by language that every attorney would call normal. Bring in a transaction-specific attorney who has reviewed M&A documents before. A general practitioner who does wills and contracts will slow down your deal.

Thinking the deal is done. A signed LOI is not a closed deal. It's an agreement to try to close. I've had deals break at the purchase agreement stage, during SBA underwriting, during the final walk-through of financials, and on the day before wire. Every deal I've ever worked has broken eight or nine times before it was done. The LOI is the beginning, not the end.

Letting the business slip. I'll say it one more time because it matters that much. Keep running your business through the entire process. The buyer is watching. If revenue drops during diligence, you'll face a price adjustment or a broken deal. The same business that got you to LOI needs to be the same business at the closing table.

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FAQ: Letters of Intent for Business Sellers

What is a letter of intent when selling a business?

A letter of intent (LOI) is a non-binding document that outlines the general terms of a business acquisition before the final purchase agreement is drafted. It covers purchase price, deal structure, exclusivity, and due diligence conditions. Non-binding means either party can walk away, but it sets the framework for everything that follows.

What are the most important sections in an LOI?

The most critical sections are: total purchase price and how it is structured (cash, seller note, earnout, SBA financing), exclusivity period (no-shop clause), due diligence conditions, escrow amount and terms, closing timeline, and access to information. Exclusivity is the clause that should receive the most scrutiny from sellers.

Is a letter of intent legally binding?

Most LOIs are non-binding in their totality, with two key exceptions: the exclusivity clause (which requires the seller to stop marketing the business for a set period) and the confidentiality provision (which requires both parties to keep negotiations private). Both of those sections carry real legal weight.

What is an exclusivity clause in an LOI?

An exclusivity or no-shop clause requires the seller to stop showing the business to other buyers for a specified period, typically 30 to 60 days after signing. This is the most consequential clause for sellers because it removes your options. Once you sign, you stop generating competing offers, which weakens your position if the buyer retrads during due diligence.

How long does it take from LOI to closing?

The post-LOI timeline is typically 60 to 120 days. Due diligence runs 2 to 4 weeks. The purchase agreement negotiation takes 3 to 6 weeks. If the buyer is using SBA financing, add another 4 to 6 weeks for bank underwriting. The biggest variable is momentum. Deals that lose momentum after LOI often break before they close.

What is an earnout in an LOI?

An earnout ties a portion of the purchase price to the business's future performance after closing. Sellers receive additional payments if the business hits specified revenue or profit targets in the months or years following the sale. Earnouts are more common on larger deals and when the buyer cannot fully underwrite the seller's projections. The more buyers competing for your business, the less likely you face an earnout.

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One More Thing Before You Sign

I want to leave you with the thing that matters most when you get your first LOI.

Don't sign it alone. Don't sign it fast. And don't sign it without understanding the exclusivity clause.

I guarantee I can bring you 40 serious buyers and get you an LOI in less than four months. That guarantee exists because competitive tension is not just a nice-to-have. It's the mechanism that protects every clause in that LOI from being used against you after you sign.

The best position at the LOI table is the position where you have options. Multiple buyers, multiple offers, multiple paths forward. That's not luck. That's what a properly run process produces.

If you want to understand what your business is worth and what a competitive sale process looks like for your specific situation, start with a free valuation. It takes 20 minutes. It tells you what you're working with. And it's a much better starting point than wondering what that headline number in your first LOI means.