Understanding Letters of Intent (LOI) When Buying a Business

What an LOI Actually Is — and What It Isn't

A Letter of Intent is a written document that signals a buyer's serious interest in acquiring a business and establishes the foundational terms of a proposed deal before the parties move into formal purchase agreements and deep due diligence. Think of it as the bridge between "I'm interested" and "we have a deal." It's more than a handshake but less than a binding contract — and understanding exactly where that line falls is critical before you sign one.

Most LOIs in business acquisitions are non-binding on the core economic terms — meaning either party can still walk away from the price or structure — but they typically contain a handful of genuinely binding provisions. Those binding clauses include exclusivity (also called a "no-shop" period), confidentiality obligations, and sometimes a deposit or good-faith payment. Confusing the binding from the non-binding sections has caused buyers to lose deposits, get sued over breach of exclusivity, or inadvertently waive negotiating leverage. Read every clause with that distinction in mind.

The Core Components of a Business Acquisition LOI

A well-drafted LOI for a business purchase typically covers the following elements. Each one carries negotiating weight and will directly shape the definitive purchase agreement that follows.

1. Purchase Price and Structure

This is the headline number, but the structure beneath it matters just as much. Is the offer all-cash at closing? Does it include seller financing — commonly 10–20% of the purchase price carried over 3–5 years at 6–8% interest in today's market? Is there an earnout tied to future revenue or EBITDA targets? A $500,000 all-cash offer and a $600,000 offer with a $150,000 earnout are not equal. Spell out each component with specific dollar amounts and conditions. Vague language like "subject to seller financing terms to be negotiated" is a red flag — define the terms in the LOI itself.

2. Assets vs. Stock/Membership Interest

Most small business acquisitions — those under $5 million in transaction value — are structured as asset purchases, where the buyer acquires specific assets (equipment, customer lists, intellectual property, inventory, goodwill) rather than the legal entity itself. Asset deals protect buyers from unknown liabilities such as prior tax debt, lawsuits, or undisclosed obligations. Stock or membership interest purchases are more common in mid-market deals above $5M, where preserving contracts, licenses, or key relationships tied to the entity makes a stock deal preferable. Your LOI must specify which structure you're proposing — and why — because the tax treatment for both seller and buyer differs substantially.

3. Included and Excluded Assets

Define what's in and what's out. A manufacturing business selling for $1.2 million might own real estate, vehicles, CNC equipment, and a proprietary software tool. Are all of those included? If the seller owns the building and is retaining it to lease back to you, the LOI should state the proposed lease rate and term — typically NNN at market rate with a 5–10 year initial term with renewal options. Buyers who skip this step regularly discover at closing that the seller expects to take the work truck, the best production equipment, or the domain name.

4. Due Diligence Period

Standard due diligence windows in small business acquisitions run 30 to 60 days from the signing of the LOI. Mid-market deals often require 60 to 90 days. Use this section to specify what you'll be reviewing: three to five years of tax returns and P&L statements, lease agreements, key customer contracts, employee records, equipment lists with condition notes, and any pending litigation. Your LOI should include a right to terminate the deal without penalty during the due diligence period if findings materially differ from what the seller represented. This is your escape hatch — protect it.

5. Exclusivity / No-Shop Period

This is the binding clause buyers most often underestimate. Once you sign an LOI with a 30- or 45-day no-shop provision, the seller is contractually prohibited from entertaining other offers during that window — and you're expected to move. Sellers with broker representation (particularly in competitive markets like South Florida, Texas, and California) will push for shorter exclusivity periods of 21–30 days. Buyers who need SBA financing should know that 30 days is almost never enough time to complete an SBA 7(a) loan package — typical SBA processing runs 45–90 days. If you're financing the acquisition, negotiate for at least 60 days of exclusivity and build in a 30-day extension option if the lender is still processing.

6. Deposit / Good-Faith Escrow

Many sellers, especially those represented by brokers, will request a good-faith deposit of $5,000 to $25,000 held in escrow at LOI signing or shortly after. This deposit is typically refundable if you terminate during the due diligence period for legitimate findings, but non-refundable if you simply walk away without cause. Confirm in writing who holds the escrow (typically the business broker, a title company, or an attorney), what the release conditions are, and what constitutes a "legitimate" termination. In Florida, escrow disputes in business transactions are governed under Chapter 475 of the Florida Statutes, and disputes between parties are common when these terms are left ambiguous.

7. Closing Timeline and Conditions

Define your expected closing date — typically 60 to 120 days from LOI execution — and list the conditions that must be satisfied before closing occurs. Common conditions include: satisfactory completion of due diligence, financing approval, landlord consent to lease assignment, transfer of key licenses (liquor licenses, contractor licenses, healthcare permits), and seller delivering training and transition support, usually 2–4 weeks of hands-on training included in the sale price.

State-Specific Considerations That Affect Your LOI

While LOIs themselves are largely a matter of contract law, a few state-level factors meaningfully affect how you structure them. In California, bulk sale notice requirements under the California Commercial Code can affect asset purchase timelines — buyers need to factor in a mandatory creditor notification period of approximately 12 business days. In Texas, the lack of a state income tax makes asset vs. stock deal structures slightly different in post-closing tax planning compared to high-income-tax states like New York or New Jersey. In Florida, the document stamp tax on business asset purchases and the absence of a state income tax both factor into how sellers price their deals and what they'll accept in terms of structure. If you're buying in Florida, Barrett Henry at buythe.biz works directly with buyers and sellers and can connect you with transaction attorneys familiar with Florida-specific requirements.

Common LOI Mistakes Buyers Make

• Anchoring too low on price: An LOI that opens 40–50% below asking price on a well-documented business signals that you're not serious and often ends the conversation entirely. A respectful opening for a business trading at 3x SDE is typically 10–20% below asking, not 50%.
• Leaving earnout terms vague: "Earnout subject to business performance" is not a term — it's a placeholder for a future argument. Define the metric (gross revenue, EBITDA, number of clients retained), the measurement period, and the payment schedule.
• Skipping the lease review before signing the LOI: If the business is location-dependent — a restaurant, a fitness studio, a medical practice — review the existing lease before you sign the LOI. A lease expiring in 18 months with no renewal option can cut the value of your acquisition in half.
• Not involving an attorney before signing: LOIs feel informal, but the binding provisions — especially exclusivity and deposit terms — carry real legal weight. A transaction attorney reviewing your LOI typically costs $500–$1,500 and can save you tens of thousands in disputes.
• Ignoring working capital: Most LOIs don't address what level of working capital the seller will leave in the business at closing. Negotiate a normalized working capital target and include it in the LOI so it doesn't blow up the deal at the purchase agreement stage.

How the LOI Connects to the Rest of the Acquisition Process

The LOI is not the finish line — it's the starting gun. Once both parties sign, you move into a compressed, high-stakes phase: due diligence, financing finalization, lease assignment negotiation, and purchase agreement drafting all happen simultaneously. Buyers who treat the LOI as a casual first step often find themselves overwhelmed in the 60-day sprint that follows. Go into LOI execution with your CPA, attorney, and lender already identified and briefed on the deal. Your due diligence checklist should already be drafted. Your SBA lender or financing source should already have your pre-qualification package in hand.

Working with a qualified business broker — either directly in Florida through Barrett Henry or through his nationwide referral network in other states — means you'll have professional guidance on LOI structure, market-appropriate valuation multiples, and deal terms before you commit your signature and your deposit to a transaction.