Letter of Intent to Buy a Business: What Buyers Should Understand Before Signing

What You Need to Know

A letter of intent, or LOI, moves a business purchase from casual interest to serious negotiation. It outlines the main proposed terms and creates the framework for due diligence, financing, purchase agreement negotiation, and closing. It is usually not the final purchase agreement, but it matters a great deal. A sloppy LOI breeds confusion, mistrust, delays, and unnecessary drama, and business deals already arrive with enough drama without importing extra. A clear LOI, by contrast, is the difference between a deal that moves and a deal that argues.

What an LOI Is

An LOI is a preliminary document that typically outlines purchase price, deal structure, deposit, financing, due diligence period, exclusivity, closing timeline, assets included and excluded, inventory treatment, training, transition support, real estate terms if applicable, and other major conditions. It puts the shape of the deal on a single page so both sides can confirm they are actually close before investing in lawyers, lenders, and full diligence.

Binding and Non-Binding: The Part Buyers Misunderstand

Most LOIs are non-binding on the final purchase terms, meaning neither side is locked into closing, and the deal still depends on diligence, financing, and a definitive purchase agreement. But certain provisions are commonly binding even in a “non-binding” LOI, and buyers should know which ones before signing.

• Confidentiality is usually binding, often reinforcing the NDA.
• Exclusivity or a no-shop period is usually binding, committing the seller to stop negotiating with others for a set time.
• The deposit terms and how the deposit is treated may be binding.
• Most everything else, price and structure included, is typically a framework subject to diligence and the final agreement.

This mix is intentional. The binding parts protect the process so both sides can invest in it; the non-binding parts preserve each side’s ability to walk if diligence reveals something material. Read the LOI carefully, because the label “non-binding” at the top does not mean every line is.

Why an LOI Matters

The LOI tells the seller the buyer is serious enough to commit terms to writing, and it tells the buyer whether the seller will engage on those terms. Without one, both sides can talk in circles for weeks without knowing whether they are even close on price, structure, financing, timing, and expectations. That is not a process. That is a business-transaction group chat with no adult supervision, and it usually ends with both sides frustrated and no deal.

Preliminary Review Before the LOI

Before submitting an LOI, review enough to understand whether the business fits your goals and whether the proposed terms are reasonable: a confidential summary, basic financials, the asking price, a general overview, location, industry, owner role, employee count, a lease or real estate summary, and conversations with the broker. Think through financing, down payment, experience, and transition needs. If you are still scanning businesses for sale in Michigan, this is the homework that lets you write an LOI worth taking seriously.

Why Full Due Diligence Usually Waits for the LOI

The LOI is what opens the door to deeper diligence. Sellers should not be expected to release every tax return, customer list, employee detail, vendor agreement, bank statement, and proprietary operating record before a buyer has proposed serious terms. Buyers sometimes say “I need to see everything before I make an offer.” Sellers usually hear “I’m not ready to follow a normal process.” The stronger move is to make an informed offer, subject to due diligence. It signals competence, and competence gets deals done.

Price and Structure

State the proposed purchase price and exactly how it will be paid. Cash at closing? SBA financing? Seller financing? Earnout? Holdback? A combination? A price without structure is incomplete. “I’ll pay $1,000,000” means very little if $400,000 depends on future performance, $200,000 is a seller note, and you still need lender approval. Spell out the pieces so nobody fills the gaps with their own assumptions later, because mismatched assumptions discovered at the purchase-agreement stage are where deals quietly fall apart.

Due Diligence Period

Define the due diligence window. This is when you review financial, operational, legal, employee, customer, lease, and equipment information. The length tracks complexity: a small Main Street deal might run two to four weeks, while a larger or real-estate-heavy deal may need 45 to 60 days or more, especially when SBA financing and appraisals are involved. It should be long enough to be meaningful and short enough that the seller does not feel trapped in transaction purgatory while their business sits in limbo and their other buyers drift away.

Exclusivity

Many LOIs include exclusivity, sometimes called a no-shop period, where the seller agrees not to negotiate with other buyers for a defined time while you conduct diligence and work toward closing. Exclusivity protects your time and expense, since you are about to spend money on legal and lender review. It is a real concession from the seller, because the business comes off the market and other buyers cool. Do not ask for it casually or for an unreasonably long window. If you want the seller to stop talking to everyone else, move like a serious buyer, with financing lined up and diligence ready to start, not like someone still browsing the lot.

Deposit

A deposit, often called earnest money, signals seriousness and may be refundable or non-refundable depending on the agreement and the stage. A common and buyer-friendly structure makes the deposit refundable during the due diligence period and then “hard,” or non-refundable, once the buyer signs off on diligence, since at that point the buyer has confirmed the business and is committing in earnest. In many Main Street deals, deposits are held in escrow and become part of the purchase price at closing. The treatment should be explicit. Nobody should be guessing where money goes in a business sale. Guessing is for carnival games, not escrow accounts.

Financing Contingency

If you need financing, the LOI should state that the deal is contingent on obtaining acceptable financing, and it should include timelines for application, buyer cooperation, seller cooperation, and approval. Sellers want buyers who move quickly and responsibly. Do not use financing as an excuse to drift. If a loan is required, line up your business acquisition financing early and stay organized, and set a timeline that matches reality. An SBA acquisition often runs 60 to 120 days, so the financing contingency and the closing date in the LOI should reflect that, not an optimistic fantasy that sets up a missed deadline.

Training and Transition

Address seller training and transition support directly, with specifics. How many weeks? Full-time or part-time? Paid or included? Buyers often need operational training, customer and vendor introductions, employee transition help, and general knowledge transfer. Sellers need to know what is expected of them after closing so they are not surprised by open-ended demands. A vague transition clause becomes a real argument later. “Help for a while” is not a plan. It is a future disagreement wearing casual clothes, so define it now while everyone is still friendly.

Real Estate and Inventory

If real estate is included, the LOI should say whether it is being purchased, leased, appraised, financed separately, or handled through a related entity, and on what terms. If inventory is included in the price or purchased separately at closing, make that clear too, because inventory is a frequent source of last-minute disputes. Most deal disputes begin with quiet assumptions. A good LOI reduces assumptions instead of creating a treasure hunt with everyone’s money buried somewhere on the map.

What Happens After the LOI Is Signed

Once signed, the buyer typically proceeds with due diligence, financing, purchase agreement negotiation, lender underwriting, legal review, and closing preparation, while the seller keeps running the business and providing requested information. Both sides should protect momentum, because deals lose energy when they stall, and a stalled deal is a vulnerable deal. A signed LOI is not a closing. It is the start of the serious part, and the serious part rewards organization, responsiveness, and a steady pace far more than it rewards last-minute heroics.

The Bottom Line

A strong LOI helps both sides understand the proposed deal before time, money, and sensitive information are invested. Buyers use it to show seriousness and frame the transaction. Sellers use it to protect process, confidentiality, timing, and leverage. Know which provisions bind you, define the terms clearly, and set timelines you can actually meet. A good LOI does not guarantee a closing, but it builds a far better path than endless questions with no offer attached.