Letter of Intent in a Business Sale: What Every Seller Needs to Know

What a Letter of Intent Actually Is

A letter of intent (LOI) is a written document — typically two to six pages — that a buyer submits to a seller to express serious interest in purchasing the business and to outline the key terms of the proposed deal. Think of it as a handshake on paper: it says 'here's what I'm offering and here's how I want this to work' before anyone spends money on lawyers drafting a full purchase agreement. In most cases, the LOI is non-binding, meaning neither party is legally obligated to complete the sale just because they signed it. However, certain provisions within the LOI — like confidentiality clauses and exclusivity periods — are typically binding the moment you sign. That distinction matters enormously, and many first-time sellers miss it.

The Key Terms You'll See in Every LOI

While every deal is different, most letters of intent for small business sales cover the same core topics. Understanding each one before you receive an LOI puts you in a much stronger position to respond or push back.

• ›Purchase price — the total amount the buyer is offering, which may be broken into components like cash at closing, seller financing, and earnouts
• ›Asset sale vs. stock sale — whether the buyer is purchasing the business's assets (equipment, contracts, goodwill) or the actual ownership shares of your entity, which has major tax implications
• ›Included and excluded assets — specific items the buyer wants or doesn't want, such as real estate, vehicles, or certain receivables
• ›Assumed liabilities — which debts or obligations the buyer agrees to take on, and which stay with you
• ›Due diligence period — how long the buyer has to inspect your financials, operations, and legal records before committing
• ›Exclusivity clause — a binding provision that prevents you from talking to other buyers for a set period, often 30 to 90 days

Why the Asset vs. Stock Sale Question Is So Important

One of the most consequential decisions in any business sale is whether it's structured as an asset sale or a stock sale, and the LOI is where this gets decided first. In an asset sale, the buyer purchases specific things your business owns — equipment, customer lists, intellectual property, the business name — but not the legal entity itself. In a stock sale, the buyer purchases your ownership stake in the company and takes on everything that comes with it, including any hidden liabilities. Buyers almost always prefer asset sales because it limits their exposure to unknown problems. Sellers often prefer stock sales because the tax treatment is typically more favorable. The difference can mean tens of thousands of dollars in your pocket at closing, so this is one term you should never accept without running it by a CPA or transaction attorney first.

The Exclusivity Clause: The Most Binding Part of a Non-Binding Document

Here's the part that catches sellers off guard most often: even though the LOI is described as non-binding, the exclusivity clause inside it is fully enforceable. When you sign an LOI with an exclusivity period — sometimes called a 'no-shop' clause — you are legally agreeing not to solicit or accept offers from other buyers for a defined window of time, typically 30 to 90 days. If the buyer's due diligence drags on or they use the period to renegotiate the price downward, you have no leverage and no other options. Before signing, make sure the exclusivity period is as short as possible, that it has a hard end date, and that it includes conditions under which you can walk away. A good business broker or M&A attorney will negotiate these terms on your behalf.

Earnouts: When the Full Price Isn't Paid at Closing

Many LOIs include an earnout provision, which means a portion of the purchase price is paid to you after closing — but only if the business hits certain performance targets. For example, a buyer might offer $800,000 at closing and an additional $200,000 if the business generates at least $400,000 in revenue during the first year under new ownership. Earnouts are common when there's a gap between what the buyer thinks the business is worth and what the seller believes it's worth. They're not inherently bad, but they carry real risk: once you hand over the keys, you have limited control over whether those targets get hit. If an LOI includes an earnout, pay close attention to how the targets are defined, who controls the decisions that affect them, and what happens if the buyer changes the business model after closing.

What Sellers Should Do Before Responding to an LOI

Receiving an LOI can feel exciting — someone wants to buy your business. But the worst thing you can do is respond immediately or sign without a careful review. Here's a practical sequence to follow before you respond to any letter of intent.

• ›Read the entire document twice, including any attached schedules or exhibits
• ›Identify which provisions are marked as binding versus non-binding — if it's not clear, assume they're binding
• ›Send the LOI to a transaction attorney or M&A advisor before responding, even if it costs a few hundred dollars for a review
• ›Check the proposed purchase price against your own valuation — if you haven't had your business valued, this is the moment to do it
• ›Note the due diligence timeline and make sure you can actually gather the documents the buyer will request
• ›Counter in writing, not verbally — any changes to LOI terms should be documented

How a Business Broker Changes the LOI Process

If you're working with a business broker, you likely won't receive an LOI cold. A good broker will have already qualified the buyer, shared your financials under a confidentiality agreement, and helped you understand what a fair offer looks like before any paperwork arrives. When an LOI does come in, your broker can tell you whether the terms are standard, where the buyer is likely to have flexibility, and how to counter without killing the deal. Brokers who specialize in your industry or deal size will also know what earnout structures are realistic, what due diligence typically looks like for businesses like yours, and how long exclusivity periods usually run in comparable transactions. If you don't yet have a broker, BizBrokerMatch.com lets you filter for brokers who have declared experience in your industry and deal size — which means you're starting conversations with people who have actually worked through LOIs like the one you're likely to receive.

• ›Brokers can tell you if a purchase price is realistic before you get emotionally invested in a number
• ›They handle initial negotiations so you don't have to respond directly to a buyer who may be more experienced in deal-making
• ›They know which LOI terms are standard and which are aggressive
• ›They can coordinate your attorney and CPA so everyone is reviewing the same document at the same time

After the LOI Is Signed: What Comes Next

Signing an LOI is not the finish line — it's the starting gun for due diligence, which is often the most stressful part of selling a business. Once the LOI is executed, the buyer will typically request three to five years of tax returns, profit and loss statements, lease agreements, customer contracts, employee records, and a long list of other documents. This process usually takes 30 to 60 days for a small business, though it can run longer if records are disorganized or if the buyer finds something that requires explanation. During this period, the buyer may also renegotiate the price if they discover something they didn't expect. Having clean, organized financials before you ever list your business is the single best thing you can do to protect the price you agreed to in the LOI.