A well-written Letter of Intent (LOI) can be the difference between a deal that drifts and a deal that closes. It frames the big points (price, structure, timing) before lawyers draft the definitive agreement and it protects you with confidentiality and exclusivity where it counts. Below I’ll show you exactly what to include, why it matters, and share a seller-friendly LOI template you can copy and adapt.
Key takeaways (quick answers)
| Question | Short answer |
|---|---|
| What is a LOI? | A non-binding summary of the buyer’s offer and deal terms; certain clauses like confidentiality and exclusivity are often binding. Investopedia+1 |
| Why use it? | To align on price/structure and launch diligence efficiently before spending on full legal docs. Investopedia |
| Binding or not? | Make the commercial terms “non-binding,” but specify which sections are binding (confidentiality, exclusivity, governing law, access to info). Morgan & Westfield |
| Must-have terms | Price & structure, assets vs stock, assumed liabilities, diligence period, exclusivity, purchase-price adjustments (working capital), escrow/holdback, closing conditions, transition help. Nolo+1 |
| Asset vs stock sale | Asset sales usually favored by buyers (cleaner liabilities, basis step-up); stock sales often preferred by sellers (simplicity, potential tax benefits). Get tax counsel early. SmartAsset |
| Price mechanics | Consider earnouts to bridge valuation gaps; define metrics, period, and protections clearly. Wall Street Prep |
| Taxes & filings | Asset deals typically require buyer and seller to file IRS Form 8594 for purchase price allocation. IRS |
| Timeline tip | If buyer is using an SBA loan, exclusivity of ~60–90 days can be practical. Set dates and milestones. They Got Acquired |
What is a Letter of Intent (LOI)?
A Letter of Intent is a short document that outlines the major terms of a proposed business sale before you sign a definitive Asset Purchase Agreement (APA) or Stock Purchase Agreement (SPA). It’s usually non-binding as to the deal itself, but it can (and should) include binding clauses—most commonly confidentiality, exclusivity (“no-shop”), and governing law. This gives both sides enough confidence to invest in due diligence without locking either party into a bad deal. Investopedia+1
When should you use an LOI?
You have a serious buyer and a meeting of the minds on valuation ranges.
You want to avoid scope-creep in diligence by agreeing up front on structure, timing, and access.
You need exclusivity to protect your time and information while the buyer digs in. Investopedia
Essential LOI terms (and why they matter)
Purchase price & structure
State the total consideration and how it will be paid (cash at close, seller note, earnout, rollover equity). Being explicit avoids “price re-trades” later. NoloDeal structure: asset vs stock sale
Asset sale: Buyer cherry-picks assets, leaves most liabilities, and often gets a tax basis step-up.
Stock sale: Simpler operationally; sellers often prefer potential capital-gains treatment and cleaner exit.
Consult tax counsel; this choice drives tax, liability, and documentation. SmartAsset
What’s included/excluded; assumed liabilities
Clarify which assets (inventory, IP, contracts) transfer and which liabilities (e.g., trade payables, debt) the buyer assumes to prevent “who owns what” fights post-close. NoloDue diligence period & access
Specify a start date, end date, and seller’s obligation to provide financials, contracts, tax returns, and key employee access. Tie milestones to dates.Exclusivity (no-shop)
For a financed buyer (e.g., SBA loan), 60–90 days is a practical exclusivity window; shorter if it’s all-cash. Require updates and allow extensions only for defined lender steps. They Got AcquiredWorking capital target & purchase-price adjustment
Most private deals adjust the price at closing to ensure the business has a normalized level of net working capital (NWC). Define the peg, methodology, and dispute mechanism. Whiteford LawEarnout (if used)
If valuation is the sticking point, an earnout can bridge the gap. Define metrics (e.g., revenue or EBITDA), period, caps/floors, and operational covenants to prevent manipulation. Wall Street PrepEscrow/holdback & indemnity concepts
Indicate the expected escrow % and duration to cover post-closing claims; details go in the definitive agreement.Closing conditions
Examples: financing approval, satisfactory diligence, key customer/landlord consents, and board or third-party approvals.Transition & seller involvement
Outline your post-close support—e.g., 30–90 days of training or a short consulting agreement.Taxes & allocation
In asset deals, the parties typically attach a purchase price allocation and later file IRS Form 8594 reporting the agreed allocation. IRSBinding vs non-binding language
Make it crystal clear that the commercial terms are non-binding; list the sections that are binding (confidentiality, exclusivity, costs, governing law, “no public announcements”). Morgan & Westfield
Asset sale vs. stock sale: how to decide (fast)
Buyer risk & tax: Buyers tend to favor asset sales for liability protection and tax basis step-up.
Seller simplicity: Sellers often prefer stock sales to keep the entity intact and potentially achieve favorable tax treatment.
What to do: Get CPA and legal input before you sign the LOI; even small wording choices can change your tax bill materially. SmartAsset
Price mechanics that protect you
Working capital peg: Prevents a cash-drained handoff by requiring a normalized level of current assets minus current liabilities at closing. Agree on definitions up front. Whiteford Law
Earnout: Useful when growth is real but unproven. Keep the math simple, define control rights, and include audit and dispute language. Wall Street Prep
Purchase price allocation: In asset sales, align early on the allocation and capture it in the LOI to minimize later tax friction; both sides will report it on Form 8594. IRS
Timeline & process checkpoints
LOI signed → buyer opens diligence data room.
Week 1–2: financial & legal document requests, management Q&A.
Mid-process: third-party lender or SBA underwriting (if applicable). An SBA-backed buyer commonly needs ~60–90 days to close—set exclusivity accordingly and require status updates. They Got Acquired
Final two weeks: finalize APA/SPA, schedules, bringdown reps, escrow terms, and closing mechanics.
Real-life mini-example
A Main Street e-commerce owner accepted a $2.4M offer but worried the buyer’s bank could delay closing. We set a 75-day exclusivity with milestone check-ins, added a $250K escrow for 12 months, and included a revenue-based earnout for upside protection. The deal closed on day 68; the seller later earned the full earnout thanks to a seasonal spike the buyer initially discounted.
Free LOI template (seller-friendly)
[Date]
Buyer: [Legal Name, Address]
Seller: [Legal Name, Address]
Target Business: [Entity name and state]
1) Purchase Price & Structure (Non-Binding). Buyer proposes a purchase price of $[amount], payable as follows: $[cash at close]; $[seller note/terms, if any]; $[earnout terms, if any]; $[rollover equity, if any].
2) Structure (Non-Binding). The parties contemplate a [asset/stock] acquisition. Included assets (high level): [inventory, equipment, IP, domain, customer contracts]. Excluded assets: [cash, personal vehicles, etc.]. Assumed liabilities: [list only if applicable].
3) Due Diligence (Binding as to access & confidentiality). Upon execution, Seller will provide reasonable access to financial statements, tax returns, key contracts, HR and operational data for a period ending [date].
4) Exclusivity / No-Shop (Binding). From the date hereof until [date] (unless extended by mutual written agreement for lender/legal steps specified here), Seller shall not solicit or negotiate with other parties regarding a sale of the Business or its assets.
5) Working Capital & Adjustments (Non-Binding). The definitive agreement will include a net working capital target of $[peg], calculated per GAAP and customary practices for the Business, with a post-closing true-up.
6) Earnout (if applicable) (Non-Binding). Additional consideration of up to $[cap] based on [metric] measured over [period] with definitions, audit rights, and dispute resolution to be set forth in the definitive agreement.
7) Escrow/Holdback (Non-Binding). $[amount or %] of the purchase price will be placed in escrow for [months] to secure indemnity obligations.
8) Conditions to Closing (Non-Binding). Satisfactory completion of diligence; financing approval (if any); required consents (landlord, key customers, lender); mutually agreeable definitive agreements.
9) Transition (Non-Binding). Seller will provide [X] days of transition support post-closing, with a consulting agreement as needed.
10) Costs (Binding). Each party bears its own fees and expenses.
11) Confidentiality (Binding). The existence and terms of this LOI are confidential and subject to the parties’ existing NDA dated [date] (or, if none, the confidentiality terms herein).
12) Non-Binding Effect; Binding Sections. Except for Sections 4, 10, 11, and 13, this LOI is an expression of present intent only and is not a binding agreement to consummate a transaction. No other obligations arise unless and until the parties execute definitive agreements.
13) Governing Law (Binding). This LOI is governed by the laws of the State of [state].
Please confirm agreement with the foregoing by signing below.
Buyer: ____________________ Date: ______
Seller: ____________________ Date: ______
(Tip: Keep the LOI short—2–4 pages. More detail belongs in the APA/SPA to avoid accidentally creating binding obligations.) Morgan & Westfield
Practical tips to stay in control
Lead with structure and timing, not just price. A “higher” offer with a long, loose diligence period and unlimited retrade rights is often worse than a slightly lower but tighter deal.
Nail down definitions. Especially around working capital and any earnout—simple definitions reduce disputes. Whiteford Law+1
Align on tax items early. Agree on purchase price allocation approach in the LOI (asset deals) to avoid last-minute drama and inconsistent Form 8594 filings. IRS
Time-box exclusivity. Tie extensions to clear lender/legal milestones; don’t grant “open-ended” no-shop periods. If SBA-financed, 60–90 days is a reasonable planning anchor. They Got Acquired
Proof of funds or lender pre-screen. Ask for evidence up front to filter tire-kickers.
Sources
Investopedia — What a Letter of Intent is and how it’s used. Investopedia
Morgan & Westfield — LOI basics; typical binding vs non-binding sections. Morgan & Westfield
NOLO — What to include (price/consideration and key terms). Nolo
SmartAsset — Asset vs stock sale considerations for small business M&A. SmartAsset
Whiteford, Taylor & Preston — Working capital pegs and purchase-price adjustments. Whiteford Law
Wall Street Prep — Earnouts in M&A: definition and use. Wall Street Prep
IRS — About Form 8594 (Asset Acquisition Statement) for asset sales. IRS
TheyGotAcquired — SBA-financed buyer timelines (60–90 days). They Got Acquired
Disclaimer
This article is for educational purposes and is not legal, tax, or financial advice. Business sales involve significant legal and tax implications—consult a qualified attorney and CPA before signing an LOI or definitive agreement.