What is a letter of intent (LOI) when buying a business?
A letter of intent (LOI) outlines the material terms of a proposed business acquisition — including price, structure, timeline, and conditions — but is not the legally enforceable contract that binds the parties to complete the sale.
What an LOI is and its purpose
The LOI serves as a roadmap for the transaction. It documents what the buyer and seller have agreed to in principle before incurring the time and expense of comprehensive due diligence and drafting definitive legal agreements. The LOI establishes mutual understanding on the deal's core terms and allows both parties to move forward with confidence that they are aligned on price, structure, and expectations.
Key components of a business acquisition LOI
A letter of intent typically includes the proposed purchase price, payment structure (cash, seller financing, earnout), and the key assets or shares being acquired. It establishes the timeline for due diligence completion and sets an expected closing date, commonly 60 to 120 days from LOI execution.
LOIs may include conditions precedent such as satisfactory completion of due diligence, financing approval, lease assignment approval, or key employee retention. The LOI typically addresses who bears transaction costs — legal fees, accounting fees, due diligence costs — if the deal does not close.
Binding vs. non-binding provisions
Most LOI provisions are non-binding except for exclusivity (no-shop clause), confidentiality obligations, and expense allocation. The no-shop or exclusivity clause prevents the seller from soliciting or entertaining other offers during the exclusivity period. Exclusivity periods typically range from 30 to 90 days.
While the commercial terms in the LOI — price, structure, timeline — express intent and guide negotiation, they do not legally obligate either party to close the transaction. The definitive purchase agreement (Asset Purchase Agreement or Share Purchase Agreement) is the binding contract that supersedes the LOI and legally obligates the parties to close.
When the LOI comes into play in the deal timeline
The LOI is typically submitted after initial discussions and preliminary due diligence but before comprehensive due diligence and definitive purchase agreement drafting. A buyer submits an LOI once they have reviewed high-level financials, operations, and customer or supplier relationships and are prepared to move forward with a formal offer. The seller reviews the LOI, negotiates terms if necessary, and signs to signal agreement to proceed exclusively with that buyer during the exclusivity period.
How an LOI differs from a purchase agreement
The LOI is a preliminary, largely non-binding document that sets the framework for the deal. The purchase agreement — whether an Asset Purchase Agreement or a Share Purchase Agreement — is the final, binding contract that contains detailed representations and warranties, indemnities, closing conditions, and post-closing obligations. The purchase agreement supersedes the LOI and is the document that legally compels both parties to complete the transaction if all conditions are satisfied.
This article is for informational purposes only and does not constitute legal or business advice. Every business purchase is different. Before signing a letter of intent or entering into any transaction agreement, consult a qualified legal or M&A professional familiar with your specific situation.
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