What Is an LOI? How to Write a Letter of Intent That Protects You Without Killing the Deal

The short version

• A letter of intent for a small business purchase locks down four things: price, structure, exclusivity, and contingencies.
• Most of it is non-binding, but a few clauses are not, and buyers routinely give away their position on both.
• The discount you are buying against is real: an owner-dependent business sells near 1.65x and an owner-light one near 3.5x, and the LOI is where that gap first gets tested.
• Below: the four levers, what each one protects, and how to ask for protection without scaring the seller off.

The LOI is where the deal is actually shaped, not the contract that follows it. By the time lawyers are drafting the purchase agreement, the price, the structure, and the buyer's right to walk are mostly already set.

Most buyers treat the letter of intent as a formality, a handshake on paper before the real work starts. That is precisely how they give away the standing they will wish they had kept.

A letter of intent in a small business purchase is the document where you decide what you are buying, on what terms, and under what conditions you can change your mind. Get those four things right and the rest of the deal has guardrails.

This article names the four levers an LOI should lock down, what each one protects, and how to protect yourself without reading like a buyer about to retrade before diligence has even started.

What a letter of intent actually is

A letter of intent in a business purchase is a short written document that states the price, the deal structure, and the major conditions a buyer proposes before drafting a binding purchase agreement. Most of it is non-binding and exists to signal serious intent and frame the deal, though a few clauses, usually exclusivity and confidentiality, do bind both sides.

So the LOI does two jobs at once. It tells the seller you are serious enough to commit terms to paper, and it sets the frame that every later document negotiates inside of.

Sellers read an LOI as the offer. Once a number and a structure are on the page, moving off them later reads as retrading, and retrading is what kills small deals.

That is the discipline the LOI demands. You are not sketching a rough idea; you are setting the terms you intend to hold, with room to verify them in diligence.

There are four levers worth getting right before you sign:

• Price: the number and how it is paid.
• Structure: what you are actually buying and how the money is financed.
• Exclusivity: the window where the seller stops talking to other buyers.
• Contingencies: the conditions that let you walk or adjust.

The next sections take each one in turn.

The four things an LOI must lock down

Treat these as the load-bearing clauses. Everything else in the LOI is packaging around them.

1. Price and how it is paid. State the purchase price and split it into its parts: cash at close, the number you negotiated before it was written down, any seller note, and any earnout. A single headline number with no payment structure hands the seller an anchor and tells you nothing about your own cash position.
2. Deal structure. Name whether the deal is an asset or a stock purchase, because that one choice changes your tax basis, your liability exposure, and what transfers. State the financing too: most small deals run on an SBA 7(a) loan, and the lender will want the structure spelled out early.
3. Exclusivity. Specify a no-shop period during which the seller takes the business off the market and stops entertaining other offers. Without it, you fund diligence while the seller keeps shopping your price to someone else.
4. Contingencies. List the conditions your offer depends on: satisfactory diligence, financing approval, a clean lease assignment, and verified earnings. These are the clauses that let you walk or adjust without breaching, and they are the ones buyers most often leave vague.

Each of these connects to one question a disciplined buyer keeps asking. Does the structure protect cash flow, downside, and the working capital the business needs after close?

A price with no payment structure fails that test. So does a deal with no contingency for the diligence you have not run yet.

What stays binding and what stays open

The most common LOI mistake is not knowing which parts of your own document actually hold you. Most of the LOI is non-binding, which is the point.

The non-binding parts are the commercial terms: the price, the structure, the closing timeline. They are subject to diligence and to the purchase agreement, so the LOI is not a contract to buy at that number.

Two clauses bind both sides the moment they sign, and a third often does:

• Exclusivity: the seller is now legally committed to the no-shop window.
• Confidentiality: you cannot disclose the deal or the seller's information.
• Expense and fee allocation: often made binding too, setting who pays for what if the deal dies.

That split is where your position lives. The seller has bound themselves to stop shopping, while your price and terms stay open to whatever diligence finds.

Use that asymmetry on purpose. The exclusivity window is the time you bought to verify the business, and the contingencies are your right to act on what you find.

That tells you what to pin now and what to leave open. Pin the things that set your floor, the price basis, the structure, the no-shop window, and the diligence access, because those are hard to recover once the document is signed.

Leave open the things diligence has not answered yet, the final price adjustment and the conditions you cannot test until the books are in front of you. Pinning a number you cannot yet defend is how a buyer ends up retrading, and pinning nothing is how a seller keeps shopping the deal.

That right to verify is why a buyer can offer near the seller's number and still protect the downside.

How to protect yourself without scaring the seller

Here is where most advice goes wrong. It tells buyers to load the LOI with protections, which produces a document the seller reads as a buyer already looking for the exit.

The frame that works is survivability, not victory. Every clause you add should protect the business's cash flow, your downside, or your right to verify, and you should be able to explain it that way to the seller in one sentence.

A reasonable, deal-preserving LOI does a few specific things:

• Ties the price to verified earnings, not the broker's headline. Make the diligence contingency explicit, then read the books behind the seller's number inside the exclusivity window. The seller keeps the price if the earnings hold up.
• Names the diligence that the contingency period covers. Reference the due-diligence checklist the contingency runs against so the seller sees a defined process, not an open-ended escape hatch.
• Sets a fair exclusivity period, not an indefinite one. A no-shop window with a stated end date, long enough to finish diligence, tells the seller the off-market period closes, which makes it easier to grant.
• Keeps the financing structure honest. State the financing structure of the deal up front, because a seller who learns about your loan contingency at closing feels ambushed, and an ambushed seller walks.

The number you put in an LOI is usually yours to defend, not the seller's to prove. 86% of small business owners have no professional valuation or only a rough estimate, so the price you write is often the first real number the business has been priced at.

That cuts both ways. It gives you room to anchor on verified earnings, and it means an aggressive, poorly reasoned number reads as a buyer who has not done the work.

The discount you are negotiating against is the same one that runs through every service-business deal. An owner-dependent business transacts near 1.65x its earnings and an owner-light one near 3.5x, so the structure that protects your cash flow after the owner leaves is the structure worth holding firm on.

Protect the downside, keep the price defensible, and give the seller a document that reads as a serious buyer doing this carefully. That is the LOI that gets signed and survives diligence.

FAQ

What is a letter of intent (LOI) in a business purchase?

A letter of intent in a business purchase is a short, mostly non-binding document stating the price, deal structure, and conditions a buyer proposes before a binding purchase agreement. It signals serious intent and frames the deal, while a few clauses, usually exclusivity and confidentiality, do bind both sides.

What should a letter of intent include?

A strong letter of intent locks down four things: the price and how it is paid, the deal structure (asset or stock purchase and the financing), an exclusivity window, and the contingencies that let the buyer walk or adjust. Each clause should protect cash flow, downside, or the right to verify earnings in diligence.

Is a letter of intent binding?

Most of a letter of intent is non-binding, including the price and the commercial terms, which stay subject to diligence and the final purchase agreement. A few clauses do bind on signing, typically exclusivity, confidentiality, and how deal expenses are split if the purchase falls through.

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You cannot protect a number you have not verified.

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