What Is a Letter of Intent in a Business Sale? What to Include and Leave Out

A letter of intent, or LOI, is a preliminary document that outlines a proposed business acquisition and the process for moving toward a final agreement. It usually addresses the buyer, seller, transaction structure, price, payment terms, due diligence, and timing. It may combine nonbinding deal proposals with provisions intended to create immediate obligations, so its wording and governing law matter.

For a business owner, receiving an LOI can feel like reaching the finish line. There is a buyer, a price, and something to sign. Yet important questions may remain: What is included in that price? How much arrives at closing? What can the buyer investigate? Can the seller keep talking with other prospects? What happens if financing falls through?

A useful LOI brings those questions into the conversation before the parties spend heavily on a transaction. This guide explains what belongs in a business sale letter of intent, what usually waits for the purchase agreement, and how to evaluate the proposal as a whole. Owners working through a larger lower-middle-market file can also read the letter of intent on a $10 million sale for exclusivity, peg, and financing details that tend to harden at that size. This article stays national and general: what an LOI is, what to put in it, and how to read the money behind the headline.

At Bridge Point Advisors (Bridge Point Business Brokers), we help owners and buyers connect a proposed offer with business valuation, preparation, and the practical path to closing. Start with seller services, buyer services, or contact. Call (352) 515-0226.

This article provides general business education. An LOI's legal and tax effects depend on its wording, related agreements, governing law, and transaction facts. Have qualified advisers review the documents for your specific transaction.

Where Does the LOI Fit in the Business Sale Process?

An LOI commonly follows initial discussions, confidentiality arrangements, and enough preliminary review to support a credible proposal. More extensive diligence and final-document negotiations then develop the transaction. The sequence varies with the business, the buyer, and whether several bidders are involved.

The U.S. Small Business Administration identifies the LOI, confidentiality agreement, financial records, contracts, sales agreement, and purchase-price adjustments as distinct acquisition topics. It recommends involving legal and accounting advisers when investigating a business purchase.

Sale readiness work that belongs *before* an LOI — clean financials, organized records, and a clear story of what is for sale — is covered in how to know your financials are ready for a buyer and the 12–36 month sale-prep roadmap.

Is a Letter of Intent Legally Binding?

An LOI can contain both nonbinding and binding provisions. Many are drafted so that the parties are not yet obligated to complete the acquisition, while specified process obligations take effect. Confidentiality, exclusivity, expense allocation, and governing-law provisions are common subjects for that treatment. Their enforceability still depends on the documents, facts, and applicable law.

Ask your attorney to make the intended effect explicit and internally consistent. A statement near the beginning should not conflict with a promise elsewhere in the letter. Related documents, including the NDA and any separate exclusivity agreement, also need to fit together.

A Delaware case illustrates the point. In *SIGA Technologies v. PharmAthene*, the state's Supreme Court addressed an express obligation in signed agreements to negotiate in good faith using a term sheet that carried a nonbinding label. The court held that the agreed negotiation obligation was enforceable. The decision involved those related contracts and specific facts; it does not mean every LOI creates a duty to close.

The practical question is therefore more precise than "Is this LOI binding?" Ask: Which obligations begin when we sign, how long do they last, and what happens if negotiations end?

For example, a seller might have no obligation to accept the buyer's final purchase agreement but still have an enforceable restriction on discussing another sale during exclusivity. A party may also remain subject to confidentiality obligations after the proposed transaction ends. Those consequences should be understood before signing.

What Should Go in a Letter of Intent to Buy a Business?

The appropriate level of detail depends on the proposed deal. A straightforward owner-operated company and a complex acquisition with several entities will need different treatment. Use the following subjects to organize the discussion with your advisers.

The parties, authority, and business being acquired

Identify the actual proposed buyer and seller, the company, and the ownership interests or operations involved. A trade name may not identify the entity that owns the assets. An individual shareholder may not be the correct seller in an asset transaction.

If the buyer plans to create a new acquisition entity or bring in investors, discuss who is responsible for the obligations being signed now. Confirm who has authority to sign and which owner, board, or other approvals the transaction will require.

Specificity helps prevent avoidable confusion. "The business" might mean one location to the buyer and every related company to the seller. Name the relevant entities, locations, and exclusions early.

The transaction structure and included property

State whether the proposal is an asset acquisition, an acquisition of ownership interests, or another structure. Identify major included and excluded assets and the proposed treatment of liabilities. Do not assume that choosing an asset sale eliminates every potential liability or that an equity sale removes every consent requirement. The longer comparison is stock versus asset sale.

Discuss cash, receivables, inventory, equipment, vehicles, intellectual property, customer contracts, and real estate where relevant. If the owner keeps the building and leases it to the buyer, the proposed rent and major lease expectations can materially affect the business deal.

Structure also affects taxes. IRS guidance distinguishes sales of business assets from sales of corporate stock and partnership interests. An LLC's tax treatment and the transaction's details require their own analysis.

For a qualifying business-asset sale, the parties generally report the purchase-price allocation on Form 8594. Agree on how the allocation will be developed and resolve significant differences with tax advisers; the form does not apply automatically to every business sale.

The price and how it will be paid

Define what the stated price measures. Is it an operating-business value before cash and debt adjustments, a price for the owners' equity, or a maximum figure that includes contingent payments?

Break out cash at closing, seller financing, escrow, earnout payments, and any retained or reinvested equity. Acquisition guidance from experienced deal counsel similarly emphasizes separating these components and identifying the assumptions behind the proposed economics.

Consider an owner who wants to retire and fund a new project immediately. A larger proposal with substantial delayed payments may fit that goal less well than a smaller proposal with more cash available at closing. The comparison requires the amounts, timing, conditions, and risks — not just the number at the top of the letter.

Working capital, cash, debt, and purchase-price adjustments

If a working-capital adjustment is contemplated, identify the target or the process for establishing it, the relevant accounts, and the accounting approach. A target is a negotiated benchmark against which the amount delivered at closing is compared. Cash and debt may be treated separately from the agreed operating working capital.

Ask how receivables, inventory, customer deposits, deferred revenue, payables, accrued expenses, and unusual balances will be treated. The answer depends on the business and the negotiated definitions. "Normal working capital" is not a complete calculation.

Transaction accountants often recommend matching the accounting used for the target with the closing calculation and using detailed exhibits to show included and excluded accounts. Precise definitions of cash, debt, and transaction expenses also help avoid conflicting adjustments.

For an inventory-heavy retailer, for example, decide whether inventory is included through working capital or valued separately. Counting it in both places would distort the economics. The LOI can establish the approach, while the definitive agreement supplies the detailed calculation and dispute process.

Seller notes, earnouts, rollover equity, and escrow

These arrangements solve different problems and should be described separately.

A seller note means the seller extends credit for part of the price. Discuss principal, interest, repayment timing, security, priority relative to other lenders, and default treatment. The seller needs to assess repayment risk even when the note has a stated face amount. See seller financing: structures, risks, and when it makes sense.

An earnout makes specified consideration contingent on future results or events. Identify the proposed metric, measurement period, potential payment, and important operating assumptions. Earnout specialists emphasize the need to define performance measures and address the buyer's post-closing decisions and the seller's ability to monitor the calculation. More detail is in earn-outs, holdbacks, and contingent payments.

If an earnout depends on a product line's revenue, for instance, ask what happens if the buyer changes the brand, moves customers to another entity, or discontinues the product. Those questions can be central to the bargain.

Rollover equity gives the seller a continuing ownership investment instead of immediate cash for that portion. Discuss the entity, security, percentage, governance, dilution, and transfer or exit expectations. Its future value and liquidity remain uncertain.

An escrow or holdback reserves part of the consideration for specified obligations or adjustments. Identify its purpose, amount, proposed duration, and release conditions. A funded third-party escrow and an amount retained by the buyer also raise different custody and credit considerations.

Due diligence, information access, and confidentiality

Identify the main diligence areas, responsible contacts, expected timetable, and how information will be shared. Depending on the company, the review may involve financial records, taxes, customer concentration, contracts, employees, licenses, intellectual property, equipment, property, or cybersecurity.

Agree on protocols for employee interviews, site visits, and contact with customers, suppliers, landlords, or lenders. A seller can make relevant information available through an organized process while continuing to operate the business. The seller-side survival guide is what happens during due diligence.

Extra care is needed when the buyer is a competitor. FTC guidance discusses safeguards for competitively sensitive information, including tailored access, redaction, aggregation, and appropriate outside advisers. The parties remain independent businesses before closing; a proposed acquisition does not justify unrestricted information sharing or premature operational control.

Reference or coordinate the existing NDA. Confirm which recipients may receive information, who may announce the discussions, and what obligations continue if the deal stops.

Exclusivity, financing, and the timetable

An exclusivity provision can restrict the seller's ability to solicit, discuss, or pursue competing transactions. Define the covered activity, start date, end date, extension process, and any right to terminate exclusivity earlier. Consider milestones that demonstrate progress instead of relying on an undefined promise to move quickly.

For example, the parties could establish dates for an initial diligence request, a financing update, and the first purchase-agreement draft. The appropriate timing depends on the deal. Avoid treating any fixed number of days as a universal standard.

Keep four dates distinct: the deadline to accept the LOI, the diligence timetable, the exclusivity expiration, and the target closing date. Reaching one does not necessarily end every other obligation.

Explain the funding plan and whether financing is a proposed condition to closing. A discussion with a lender, a preliminary financing proposal, and final loan approval are different stages. Address financing sources, necessary approvals, and realistic milestones early. For loan structures many Main Street buyers use, see SBA loans and additional financing options.

Closing conditions, transition, and material risk allocation

Identify important conditions such as satisfactory completion of agreed diligence, final documents, financing if applicable, required approvals, or a suitable property lease. An LOI cannot provide a landlord's, franchisor's, lender's, or regulator's consent on their behalf.

Address the seller's expected role after closing. "Reasonable transition assistance" leaves questions about duration, hours, compensation, location, and responsibilities. A founder expecting to leave immediately needs to know if the buyer instead expects a multiyear role.

Material indemnity and restrictive-covenant expectations also deserve early discussion. Indemnification allocates responsibility for specified losses; major liability limits, escrow expectations, and duration can affect the seller's decision. Seller-side deal counsel often emphasizes understanding important risk and economic terms before granting exclusivity.

Full legal provisions can follow, but a deal-changing expectation should be identified now. Counsel should assess any proposed noncompetition or nonsolicitation restrictions under the applicable law.

Deposits, expenses, and ending negotiations

If a deposit is proposed, state the amount, timing, holder, permitted release, application to the price, and refund conditions. Explain what happens if diligence, financing, approvals, or final-document negotiations fail. A deposit is different from a post-closing escrow or holdback, and its label alone does not establish refundability.

Address who pays legal, accounting, brokerage, and other transaction expenses, including what happens if the sale does not close. Any reimbursement or termination fee needs explicit treatment and review. Also identify how negotiations may end and which obligations survive; ending the deal discussion may leave confidentiality or other agreed duties in place.

What Does Not Belong in an LOI, and What Should Wait?

The aim is to agree on the material proposal without turning the LOI into an unfinished purchase agreement. Detailed legal implementation often follows, but issues that determine whether the parties want the deal should be surfaced early.

The definitive agreement is where the transaction's full commitments are documented. SBA sale guidance emphasizes careful treatment of assets, liabilities, inventory, information access, and other sale terms, with attorney review.

Some material should generally stay out of the LOI itself:

• Sensitive identifiers and payment instructions. Bank account details, Social Security numbers, passwords, and customer-level personal information belong in appropriate secure processes when legitimately needed.
• The entire diligence file. The letter can establish access and scope without attaching tax returns, employee records, or every customer contract.
• Unsupported financial promises. Identify assumptions and estimates accurately rather than presenting unverified information as established fact.
• Accidental commitments. Avoid broad promises about guaranteed financing, automatic contract transfers, unlimited access, or completing the sale unless that is the deliberately reviewed agreement.
• Unresolved material terms disguised as agreement. If the parties have not agreed on seller financing, retained property, or an earnout, make the open issue visible.

Do not confuse "shorter" with "better." A concise letter can still be incomplete, while a longer letter may appropriately address a complex proposal. The useful test is whether it identifies the decisions that matter now.

A $2 Million LOI Example: Price Versus Cash at Closing

The following is a hypothetical illustration, not a valuation or recommended deal structure. Assume an equity acquisition starts with $2 million of agreed operating enterprise value on a cash-free, debt-free basis. The documents separately credit cash that actually transfers and deduct agreed debt once.

Also assume an operating working-capital target of $250,000 and a closing amount of $200,000, calculated using the same agreed accounts and methods. The $50,000 shortfall reduces the price in this example. A seller note and escrow then affect how the equity consideration is delivered.

The seller note is part of the consideration, but it is not immediate cash. The escrow may later be released, subject to its terms and claims. Neither should be treated as risk-free money already available to the seller.

The cash addition applies because this example assumes that cash stays in the company and transfers to the buyer. If the seller retains it before closing, the calculation must change. The debt has already been deducted in the enterprise-to-equity calculation and must not be deducted a second time.

A separately negotiated earnout would introduce another contingent component; none is included here. Fees, taxes, other adjustments, and final true-ups are also excluded. The seller's eventual net proceeds therefore require a fuller calculation.

The lesson for LOI review is practical: ask your advisers to translate every component into a clear picture of what is paid, when it is paid, and what must happen before it becomes available. Comparing two offers with different cash, notes, and contingencies is covered in how to compare two business sale offers when one is not all cash.

What Buyers and Sellers Should Check Before Signing

Sellers should review the proposal against their own goals. Determine the amount of cash needed at closing, willingness to finance the buyer, tolerance for future performance risk, and desired role after the sale. Examine the buyer's funding plan and diligence readiness before granting exclusivity. A strong headline price does not answer those questions.

Buyers should make a proposal they can investigate and finance. Identify the assumptions supporting the offer, the information still needed, and the approvals required. A proposal that depends on keeping a key employee or securing a long-term lease should say so early enough for the seller to respond. Buyers preparing an offer can also use what a buyer should have ready before making an offer.

Both sides should ask:

• Are the parties describing the same assets, ownership interests, and price?
• Which terms create obligations now, and which remain proposals?
• Are material financing, working-capital, earnout, property, and transition issues addressed?
• Do the deadlines, exclusivity provisions, and termination rights fit together?
• Have legal and accounting advisers reviewed the proposal before signature?

Where there is a genuine unresolved issue, record the question and a plan to resolve it. Apparent agreement created by vague wording is unlikely to make the next stage easier.

A Practical LOI Outline to Discuss With Your Advisers

An outline can help organize the conversation. The following is a planning checklist, not a ready-to-sign legal form:

• Proposed buyer, seller, business, and signatory authority.
• Transaction structure and included or excluded property.
• Price basis and payment components.
• Cash, debt, inventory, working-capital, and other adjustments.
• Financing plan and any proposed financing condition.
• Diligence scope, information access, and contact protocols.
• Confidentiality arrangements and permitted announcements.
• Exclusivity scope, milestones, dates, and extension rules.
• Key closing conditions and necessary third-party approvals.
• Seller transition and other material commercial expectations.
• Expenses, any deposit, termination, and surviving obligations.
• Express treatment of binding and nonbinding provisions, governing law, acceptance, and signatures.

Your advisers may combine, expand, or omit sections based on the deal. A technology business may need early attention to software ownership, while a restaurant may depend on a lease and licensing. A service company may require a detailed discussion of customer retention or the founder's continuing role. Browse industry-specific sale pages at sell your business.

What Happens After an LOI Is Signed?

The parties should turn the proposed process into an organized work plan. Assign responsibility for diligence requests, financial analysis, lender communications, legal drafting, property matters, and required consents.

Maintain a clear list of open issues. For each one, identify the information needed, the responsible person, and its effect on the proposed economics or timing. A discovered equipment problem, for example, may lead to a repair, a price discussion, an escrow, or a decision not to proceed. The appropriate response depends on the documents and negotiations.

As the purchase agreement develops, compare it with the commercial understanding recorded in the LOI. A changed definition can affect price even when the headline number stays the same. Confirm that related documents — such as a lease, seller note, consulting agreement, or escrow agreement — support the same arrangement. What actually moves at closing is covered in what transfers when you sell a business.

Track exclusivity and other deadlines deliberately. If additional time is needed, address an extension before assuming it exists. Signing an LOI is the beginning of more detailed transaction work; closing still depends on completing the agreed process and satisfying the applicable conditions.

How Bridge Point Helps Buyers and Sellers Evaluate an LOI

Bridge Point Business Brokers helps owners connect a proposed offer with business value, preparation needs, and the practical path to closing. Our nationwide brokerage work includes seller representation, business acquisition support, and business valuation discussions.

Terry Williams, Bridge Point co-founder, brings more than 20 years of experience building, scaling, and successfully exiting businesses. His entrepreneurial background includes title, real estate, and technology ventures. That perspective helps connect LOI terms with an owner's plans for retirement, reinvestment, continued involvement, or a new business.

Randy Woodruff is a Certified Public Accountant (CPA), Certified Valuation Analyst (CVA), Certified Fraud Examiner (CFE), and Certified Commercial Investment Member (CCIM). These qualifications bring accounting, business valuation, financial examination, and commercial real estate perspectives to the discussion. They are relevant when reviewing the financial assumptions behind a proposal and identifying questions for the transaction team.

The wider Bridge Point team includes attorney Brian S. Brijbag, Esq., experienced business operators, and real estate appraisers. Property appraisal and business valuation remain distinct assignments. Legal drafting, tax advice, appraisal, and brokerage work should each have an appropriate scope.

Our industry resources address a broad range of businesses, including trades, healthcare, technology, retail, hospitality, professional services, manufacturing, and transportation. The questions an LOI must resolve should reflect the actual company and transaction.

Review the Whole Proposal Before Committing to the Next Step

A useful LOI helps the parties understand the same proposed transaction. It explains the economics, identifies immediate obligations, and creates a workable process for resolving what remains.

If you have received an LOI or are preparing to make an offer, contact Bridge Point Business Brokers to discuss the business, your goals, and the next steps. We work with owners and buyers nationwide.

Explore seller services, buyer services, business valuations, and the letter of intent on a $10 million sale when the file is larger. Call (352) 515-0226, email Info@BridgePointBREA.com, or request a confidential consultation.

Sources and Further Reading

1. American Bar Association — How to Navigate Key Stages of an M&A Transaction.
2. U.S. Small Business Administration — Plan Your Business: Buying an Existing Business.
3. Wyrick Robbins — The Basics of an M&A Letter of Intent.
4. Delaware Supreme Court — SIGA Technologies, Inc. v. PharmAthene, Inc. (May 24, 2013).
5. Internal Revenue Service — Sale of a Business.
6. Internal Revenue Service — Instructions for Form 8594.
7. Goodwin — Crafting a Competitive LOI.
8. BDO — Importance of Net Working Capital in M&A.
9. RSM — Sale and Purchase Agreement Reviews.
10. SRS Acquiom — M&A Earnouts: An Overview.
11. Federal Trade Commission — Avoiding Antitrust Pitfalls During Pre-Merger Negotiations and Due Diligence.
12. Mintz — Seller Considerations When Negotiating a Letter of Intent.
13. U.S. Small Business Administration — Manage Your Business: Selling Your Business.
14. Bridge Point Business & Real Estate Advisers — About Our Team.
15. Bridge Point Business Brokers — CPA Partnership and Randy Woodruff's Credentials.
16. Time to Close Title — About Our Team and Terry Williams.
17. Bridge Point Real Estate Advisors — Certified Real Estate Appraisers.
18. Bridge Point Business Brokers — Contact and Nationwide Engagements.