In any business acquisition, the LOI is the moment the deal becomes real. Before the acquisition LOI, you're a prospective buyer. After a signed LOI, you have exclusivity, a defined structure, and a countdown clock to close.
Most first-time buyers either over-engineer the LOI (treating it like a definitive agreement) or under-engineer it (leaving critical terms undefined and creating disputes later). Neither approach serves you.
Think of the LOI as the framework for the negotiation. Get the structure right, and the details follow.
What Is an LOI?
A Letter of Intent is a non-binding document that outlines the key terms of a proposed business acquisition. The LOI for acquisition purposes signals serious intent, establishes the deal structure, and (most importantly) grants the buyer an exclusivity period to conduct due diligence without competing offers.
Non-binding means neither party is legally obligated to close. The seller can walk away. So can you. What the LOI does create is a negotiated framework and a mutual commitment to work toward closing in good faith.
There are exceptions. A few provisions in a well-drafted LOI are typically binding: confidentiality obligations, exclusivity, and cost allocation. Everything else (price, structure, terms) is the starting point for the definitive purchase agreement.
When to Submit an LOI
Submit an LOI after you've completed your initial financial analysis and are confident the deal is worth pursuing. That typically means:
- You've reviewed the CIM and the financial statements
- You've run the DSCR math and the deal pencils under SBA financing
- You've had at least one substantive conversation with the broker or seller
- You understand the deal structure options (asset vs. stock)
- You have no obvious deal-killers from initial screening
Don't submit an LOI on a deal you haven't analyzed. You'll either waste the seller's time or paint yourself into a corner on terms you haven't thought through.
Don't wait until you've answered every question, either. The LOI is the start of due diligence. If you need a signed LOI to get access to the information required to finalize your analysis, that's the right moment to submit.
Model the deal before you write the LOI
Use the free SBA calculator to stress-test your purchase price, down payment, and seller note structure before committing to terms.
Open the calculator →LOI Structure: Section by Section
There's no universal LOI template. Every well-drafted LOI covers the same core components. Here's what each section should accomplish.
Purchase Price
The headline number. State it clearly with no ambiguity about what it includes. Purchase price typically covers the business assets (or stock), goodwill, and any included equipment or real estate. It does not typically include working capital. That's negotiated separately.
Be specific about what you're buying. "Assets of the business as described in the CIM dated [date]" is better than "the business." If there are specific assets you intend to exclude (personal vehicles, excess real estate, receivables), note that here.
Deal Structure: Asset Purchase vs. Stock Purchase
This is one of the most consequential decisions in the LOI. The structure affects taxes, liability exposure, and what gets transferred to you at close.
Asset purchase: You buy the specified assets of the business and assume only the liabilities you explicitly agree to assume. You don't inherit the company's legal history, undisclosed debts, or pending litigation. Most small business acquisitions are structured this way, and buyers strongly prefer it.
Stock purchase: You buy the entity itself, including the corporate entity, its assets, and all its liabilities. This includes everything in the company's history, including things you don't know about yet. Sellers sometimes prefer stock purchases for tax reasons (favorable capital gains treatment). Buyers accept stock purchases when there are compelling reasons: contracts that can't be transferred in an asset sale, licenses tied to the entity, or when the seller demands it.
For SBA-financed acquisitions, asset purchases are overwhelmingly standard. State your structure preference clearly in the LOI. If you're open to discussing alternatives, say so. Don't leave it undefined.
Financing Contingencies
If you're using SBA financing, the LOI should include a financing contingency. The deal is contingent on obtaining SBA loan approval on acceptable terms. This protects you if the lender's underwriting comes back differently than expected.
Specify the broad parameters: "Contingent upon buyer obtaining SBA 7(a) financing of approximately $X at market terms with a term of 10 years." Don't lock in exact rates; rates move. The contingency exists to protect against the loan not being approved. It shouldn't be an escape hatch if rates move slightly.
Sellers know SBA financing takes time. Build this contingency into your LOI without apologizing for it.
Down Payment and Seller Note
State your proposed equity injection and whether you're requesting a seller note. These numbers need to work together with the SBA loan to produce a DSCR above 1.25x.
A typical structure for a $2M acquisition might look like: 10% buyer equity ($200K), 10% seller note ($200K), 80% SBA loan ($1.6M). The seller note terms (interest rate, term length, and standby provisions) matter for DSCR calculation, so state them specifically.
SBA rules require seller notes to be on "standby" for the first 24 months of the SBA loan, meaning no principal payments to the seller during that period. This is standard, and experienced sellers know it.
For a detailed breakdown of how these numbers interact, use the free SBA loan calculator to verify your structure before writing the LOI.
Due Diligence Period and Scope
Define the length of your due diligence period (typically 45 to 90 days) and what you expect access to during that time. A well-written LOI specifies the categories of information you'll need: financial records, tax returns, customer contracts, employee information, and operational data.
Don't be vague here. "Full access to all books and records" sounds comprehensive but creates disputes about scope. Specify the categories. The more precise you are, the smoother the DD process.
45 days is tight for SBA financing. The loan process alone takes 60 to 90 days. Request 60 to 90 days for due diligence if you're SBA-financed and build that into your exclusivity period.
Exclusivity Period
Exclusivity means the seller cannot solicit or entertain offers from other buyers while you're conducting due diligence. This is one of the most valuable provisions in the LOI. It protects your investment of time and legal fees during DD.
Request exclusivity for the full duration of your due diligence period plus a short buffer for closing preparation. If your DD period is 60 days, request 75 days of exclusivity.
Sellers sometimes push back on long exclusivity periods. A reasonable response: "I'm investing significant time and money in due diligence. I need protection against competing offers during that process. The exclusivity period runs concurrent with DD; it's not additional time."
Weak exclusivity (a short window, easily terminable, or no exclusivity at all) is a mistake many first-time buyers make. You'll discover what went wrong when you get a week into DD and the broker tells you there's a competing offer.
Transition and Training Period
Define the seller's post-close commitment. Standard terms are 2 weeks to 3 months of paid or unpaid transition support: introductions to key customers and employees, knowledge transfer, and operational continuity.
The length depends on the business complexity and how owner-dependent the operation is. A simple service business with documented processes might need two weeks. A relationship-heavy professional services firm with a dominant owner might need 90 days.
Get this in the LOI. It's far easier to establish expectations before the seller has their money than after.
Non-Compete Terms
Specify the geographic scope, industry scope, and duration of the non-compete you're requesting. Standard terms are 2 to 5 years within the geographic and industry footprint of the business.
A non-compete that's too narrow is nearly worthless. A seller who agrees not to compete within a one-mile radius of a landscaping business has effectively agreed to nothing. Be precise about what competition means in the context of this specific business.
Key Assumptions
State the material assumptions underlying your offer. If you're offering $2M based on $500K SDE from the most recent fiscal year, say that. If your offer assumes the business maintains its current customer base, say that. If you're assuming certain equipment is included, say that.
Key assumptions protect you when something changes between LOI and close. If the business loses a major customer during DD, your assumptions give you grounds to renegotiate the price or walk away. Without stated assumptions, the seller's position will be that you agreed to $2M regardless of what happened to the financials.
Working Capital
Working capital (the cash needed to operate the business day-to-day) is often the most contentious LOI negotiation. The purchase price covers the business. Working capital is typically negotiated separately and resolved at close.
A working capital target or peg should be defined in the LOI. This establishes the expected amount of net working capital the seller will deliver at close, and creates a mechanism for post-close adjustment if actual working capital deviates from the target.
Many first-time buyers ignore working capital in the LOI entirely and then discover, after close, that the business needs $200K in cash to cover outstanding payables. Address it early.
Closing Timeline
State your target closing date. For SBA-financed deals, 90 to 120 days from LOI execution is realistic. Factor in: due diligence period, SBA underwriting timeline, definitive purchase agreement negotiation, and closing logistics.
Don't commit to a timeline you can't meet. Missing a closing deadline erodes trust with the seller and can cost you the deal.
Asset Purchase vs. Stock Purchase: When Each Applies
Asset purchases dominate small business acquisitions because buyers don't want to inherit unknown liabilities. The general rule: default to asset purchase unless there's a compelling reason to consider stock.
Cases where stock purchase may make sense:
- Non-transferable contracts or licenses. Government contracts, professional licenses, or specialized permits that are tied to the entity and can't be assigned in an asset sale. Confirm this with your attorney; some transfers that seem impossible have workarounds.
- Seller tax requirements. Some sellers will not accept an asset purchase because of the tax treatment. This is a negotiating point. The question is how much premium the seller commands and whether it's worth it to you.
- SBA structure. Some SBA lenders have specific requirements or preferences. Confirm with your lender before committing to a structure.
If you go stock purchase, expect your attorney fees and DD scope to increase significantly. You're taking on unknown liability exposure, and the diligence required to get comfortable with that is correspondingly more intensive.
Key Negotiation Points
Price Adjustment Mechanisms
The purchase price in the LOI is based on historical financials. If the business performance changes between LOI and close (revenue drops, a key customer leaves, financial statements are restated), you want a mechanism to adjust the price accordingly.
The most common approaches: a material adverse change clause (lets you walk away if something material changes), an earnout, or a price adjustment formula tied to trailing twelve months performance at close.
Earnouts
An earnout ties a portion of the purchase price to post-close business performance. Sellers use them to justify a higher headline price. Buyers use them when they're uncertain about the sustainability of current performance.
Use earnouts carefully. They create disputes and misaligned incentives. An earnout provision creates tension between the seller maximizing short-term revenue and the buyer optimizing for long-term health. If you can close the deal without an earnout, do it. If you need one, define the metrics, measurement period, and payment terms precisely, and have your attorney review the language.
Escrow
An escrow holdback (typically 5 to 10% of the purchase price held for 12 to 24 months post-close) protects the buyer against undisclosed liabilities that surface after closing. Indemnification provisions in the purchase agreement typically cover this, but escrow gives you actual funds to draw against rather than having to pursue a lawsuit.
Sellers don't love escrow holdbacks. Expect pushback. Reasonable sellers accept modest holdbacks (5%) for a reasonable period (12 months). If a seller refuses any escrow, ask why, and make sure your representations and warranties coverage is correspondingly strong.
Seller Note Terms
Interest rate (typically 5 to 7% for seller notes), term (3 to 7 years), and standby requirements are all negotiable. The lower the interest rate and the longer the term, the better for your DSCR. Run different seller note scenarios through the SBA calculator before finalizing terms. The impact on annual debt service is material.
Common Mistakes
Being Too Aggressive on Price
An LOI that opens at 50% of asking price rarely gets a counter-offer. It signals that you haven't done your homework or aren't serious. If the math supports a lower price, support it with data: revenue trends, DSCR analysis, comparable deal multiples. A well-reasoned offer at a modest discount is far more effective than an aggressive number with no justification.
Not Including Enough Contingencies
Contingencies protect you. Financing contingency. Due diligence contingency. Material adverse change provision. Buyers who remove contingencies to "strengthen" their offer frequently regret it when something unexpected surfaces in DD.
There's a difference between being a serious buyer and being reckless. Sellers who demand the removal of reasonable contingencies as a condition of accepting an LOI are sellers trying to trap you.
Weak Exclusivity Terms
Exclusivity is non-negotiable for a serious buyer. If the seller won't grant meaningful exclusivity, you need to understand why. Legitimate reasons exist: a deadline from another buyer, timeline constraints. A seller who won't commit to exclusivity while you're spending money on due diligence is a seller who plans to use your DD as leverage with other buyers.
Forgetting Working Capital
See above. Don't skip this section. A business that closes with $50K of working capital when it needs $200K to operate is a crisis on day one.
Undefined Transition Terms
"Seller agrees to assist with transition as reasonably needed" is not a transition agreement. It's an invitation for the seller to disappear at close and define "reasonable" as two phone calls. Specify the duration, availability, and nature of transition support in the LOI.
After the LOI: What Happens Next
A signed LOI starts the clock on two parallel tracks.
Due diligence: You request the full document package from the seller. Three years of tax returns, P&Ls, balance sheets, customer contracts, employee information, and everything else in your DD checklist. Your attorney begins legal review. You verify every material assumption in your LOI.
SBA financing: Simultaneously, you engage your lender and begin the SBA application process. The lender will order an independent business valuation and conduct their own underwriting. SBA 7(a) approval takes 60 to 90 days from application submission in most cases. You can't wait until DD is complete to start this process.
The output of both tracks feeds into the definitive purchase agreement, the binding contract that governs the actual transaction. The purchase agreement incorporates the LOI terms plus all the detail resolved during DD: representations and warranties, indemnification provisions, closing conditions, and the final working capital adjustment.
For what to look for during due diligence, see the business acquisition due diligence checklist. For a complete breakdown of the SBA loan process and timeline, read the SBA 7(a) loan guide.
A Note on LOI Templates
You'll find LOI templates online. They're useful for understanding the structure. Submitting one without review is a different matter. Every deal has specific circumstances that affect the terms, and language that's fine in one context creates problems in another.
Have a business acquisition attorney review your LOI before submission. The cost is modest relative to the deal size. The attorney will catch issues you don't know to look for: ambiguous language, missing protections, provisions that don't work under your state's law.
If you're submitting your first LOI, the attorney is not optional. After you've done two or three deals and understand the mechanics, you'll have more judgment about where you can move faster and where you need expert review.
The rest of the process (screening deals, building the financial model, managing your pipeline through to close) is covered in the complete guide to buying a small business.