The Letter of Intent When Buying a Business

Conor Meyers — Co-Founder & Business AttorneyHas built and run businesses; advises owners on contracts, transactions, and risk. About Conor →

It is called non-binding. Parts of it are not, and the rest sets the gravity for everything that follows.

A letter of intent is the moment a conversation becomes a transaction. It captures price, structure, timing, and the conditions on which the parties will proceed, and it does so before either side has spent seriously on diligence or drafting. The label is misleading. Binding vs non-binding LOI provisions sit side by side in the same document, and the ones that bind carry real consequences.

We handle these matters for growth-stage companies in Idaho and California. This is general information — not legal or tax advice on a specific situation.

What you concede in the LOI is very hard to win back later.

What belongs in a letter of intent

A useful LOI names the purchase price and how it will be paid, the structure, the treatment of cash and receivables, any working capital target, the escrow or holdback, and the conditions to closing. It sets a diligence period and a target closing date, and it says who bears which expenses if the deal does not complete.

It should also name the structure explicitly. An LOI that leaves asset-versus-equity open is agreeing a price without agreeing what that price is worth after tax and assumed risk, and that gap is where late re-trades come from.

Naming the structure early is what stops the negotiation restarting.

Binding vs non-binding LOI provisions

Almost every LOI states that the commercial terms are non-binding. What is easy to miss is the short list of provisions that are binding and enforceable in the ordinary way: confidentiality, exclusivity, expense allocation, governing law, and sometimes a break fee.

The document should say plainly which sections bind and which do not. Where that separation is not explicit, a court asked to interpret the parties’ intent may look at conduct rather than labels, and a buyer who believed the whole document was a formality can find otherwise.

The label on the document does not decide which parts bind.

Exclusivity period in an LOI

The exclusivity period in an LOI, sometimes called a no-shop, stops the seller from talking to other buyers for a defined window. Buyers want it because diligence is expensive and they will not spend without protection. Sellers give it reluctantly because it removes their leverage.

Two details do most of the work. Length should match the diligence actually required, not a default. And it should end automatically rather than roll, so a buyer who slows down does not hold the seller off the market indefinitely.

Exclusivity should expire on a date, not on the buyer’s convenience.

From LOI to definitive agreement

Moving from LOI to definitive agreement is where diligence findings meet the agreed terms. Price adjustments at this stage are normal where diligence uncovered something material, and objectionable where they simply reflect a buyer testing whether the seller will hold.

Buyers financing the purchase should also confirm early what the lender will require at closing; the SBA’s buy-or-sell guidance sets out the documentation most acquisition lenders expect. The best protection against the second kind is specificity in the LOI. LOI purchase price adjustment language that names the mechanism — a working capital peg, a defined debt-free cash-free basis, a stated escrow — leaves far less room to reopen. Where acquisition financing is involved, the SBA 7(a) program imposes its own requirements that should be reflected in the LOI rather than discovered later.

Specificity in the LOI is the cheapest anti-re-trade device there is.

The underlying rules on this are published directly by Internal Revenue Service, Idaho Legislature, and both are worth reading before you rely on a summary of them — including this one.

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