What is a letter of intent when buying a business?
A letter of intent (LOI), also called a heads of agreement, term sheet or memorandum of understanding depending on where you are, is the document that turns a conversation into a deal. It sets out the main terms both sides agree on before anyone spends serious money on lawyers, accountants and lenders.
It isn’t the sale contract. The sale and purchase agreement (SPA) comes later, after due diligence. But the LOI is where the deal is really made. Terms that aren’t in it are hard to add later, and a seller who has signed one has stopped talking to other buyers.
Is a letter of intent legally binding?
Mostly no, partly yes. A typical LOI says:
- Non-binding: price, structure, timing and conditions. Either side can still walk away if due diligence or financing doesn’t work out.
- Binding: confidentiality (you won’t share what you learn), exclusivity (the seller won’t negotiate with anyone else for a set period), and often who pays which costs and which law governs the letter.
Write clearly which clauses bind and which don’t. Ambiguity is how an LOI ends up in a dispute. Have a lawyer check it before you sign.
What should a letter of intent include?
| Clause | What it says | Why it matters |
|---|---|---|
| Parties and target | Who is buying what: shares or assets, which entities | Sets the legal shape of the deal |
| Price | The headline price, or how it will be calculated | The number everyone remembers |
| Funding structure | Split between senior debt, seller finance and seller rollover | Decides whether you put cash in |
| Seller note terms | Amount, term, interest, start date, security | How and when the seller is paid over time |
| Rollover terms | Stake size, rights, future buy-out | The seller’s ongoing role as a shareholder |
| Working capital | The level the business must hand over at settlement | Stops the business being emptied before you take over |
| Conditions | Due diligence, financing approval, key staff, leases, licences | Your exits if something is wrong |
| Exclusivity | No-shop period, often 60–90 days | Time to do due diligence without a rival |
| Transition | How long the seller stays and in what role | Protects relationships and know-how |
| Timeline | Target dates for due diligence and settlement | Keeps momentum |
| Confidentiality | What both sides can disclose | Protects staff and customers from rumours |
How do you write a letter of intent for a business? Step by step
- Agree the deal verbally first. The LOI should record terms the seller has already said yes to, not open a negotiation.
- Lead with the structure, not just the price. Write out each part of the funding.
- Set conditions you genuinely need, such as satisfactory due diligence and financing approval, and no more. A long list of conditions reads as a buyer looking for a way out.
- Ask for exclusivity long enough to finish due diligence and financing.
- Agree a working capital target so the business you get is the business you priced.
- Keep it short. Two to four pages is common. Detail belongs in the SPA.
- Have a lawyer review it before you send it.
What does the funding section of an LOI look like? (illustrative)
Illustrative only. For a $1.5M purchase using a 70/20/10 structure:
Notice it names all three parts: senior debt, seller finance and seller rollover. A seller who signs this knows exactly how much arrives at settlement, how much comes later, and what they keep. There’s nothing to renegotiate in month two. Before you write numbers like these, check them against a debt service coverage ratio of around 1.5x; see DSCR explained.
What are the most common LOI mistakes?
- Price only, structure "to be agreed". The structure is the deal. Leaving it vague means renegotiating the most important term after the seller thinks you’ve agreed.
- No working capital clause. The seller collects every receivable and leaves you an empty account.
- Exclusivity too short. Due diligence and financing take time. Run out and the seller can start talking to someone else.
- Sending it too early. An LOI the seller wasn’t expecting feels like pressure. Agree the terms in conversation first.
- Skipping questions you should have asked. Our list of questions to ask a business seller covers what to cover before you write anything down.
What happens after the LOI is signed?
Due diligence starts: financial, legal, operational and commercial. You verify the earnings, contracts, staff, licences and assets. The lender completes its credit approval. Lawyers draft the SPA, the seller note and the shareholders’ agreement for the rollover. If due diligence finds problems, the LOI’s conditions let you renegotiate or walk away. Our guide to due diligence red flags covers what to look for.
The 90-day path to a signed LOI
This is how we run it with owners of established $1M+ businesses. It’s done with you, not for you: you are the buyer, so sellers and lenders need to deal with you.
Weeks 1–2: audit and target profile. We audit your business with you: what you do well, what your team can absorb, what your profit can support. Then we set your target profile, the type and size of business that could double or triple yours. Often that’s a competitor, or an owner nearing retirement in your industry.
Weeks 3–8: outreach. You contact owners, both listed and off market, using our scripts, and we coach every conversation. Most of the best targets aren’t for sale until someone asks. See how to find off-market businesses for sale.
Weeks 9–13: negotiation, financing and the LOI. We’re in the room as you negotiate. We line up the financing with you so the structure is credible before you put it in writing. Then you sign the LOI.
The promise is a signed LOI within 90 days, and it comes with a 7-day money-back guarantee. Settlement follows after due diligence and lender approval, which runs on its own timeline.
Want a signed LOI in 90 days?
On an acquisition strategy call we look at your business, your market and what your first target could be. See if you qualify.