Letter of Intent (LOI) Template: What to Include When Selling Your Business

The letter of intent is one of the most consequential documents you will encounter when selling your business. It arrives after initial conversations have gone well, after the buyer has seen enough to get serious, and before the grueling due diligence process begins. It sets the tone for everything that follows.

Yet many business owners treat the LOI as a formality — a rough handshake before the real deal gets done. That is a mistake. The terms outlined in your letter of intent create gravitational pull. Once both parties sign, shifting those terms becomes exponentially harder. What you agree to in the LOI is, in most practical respects, what you will agree to in the final purchase agreement.

Understanding the LOI — its structure, its clauses, and the negotiation dynamics around it — is essential to protecting your outcome.

What Is a Letter of Intent?

A letter of intent (sometimes called a term sheet or memorandum of understanding) is a written document that outlines the key terms of a proposed business acquisition. It is typically issued by the buyer after preliminary discussions and initial review of financial information.

The LOI serves several purposes. It confirms that the buyer is serious and willing to commit resources to due diligence. It establishes the proposed purchase price and deal structure. It gives both parties a framework to negotiate against. And, crucially, it often includes an exclusivity clause that takes your business off the market for a defined period.

Most LOIs are non-binding with respect to the commercial terms — meaning neither party is legally obligated to close the deal at the stated price. However, certain provisions within the LOI are typically binding, which is where many sellers get tripped up.

Binding vs Non-Binding Provisions

This distinction matters more than most sellers realize.

Non-binding provisions typically include the purchase price, deal structure, representations and warranties, and closing conditions. These are subject to further negotiation and due diligence findings. The buyer is expressing intent, not making a guarantee.

Binding provisions usually include confidentiality obligations, exclusivity (no-shop) clauses, expense allocation, governing law, and dispute resolution mechanisms. These carry legal weight from the moment both parties sign.

The practical implication is straightforward: a buyer can walk away from the stated purchase price without legal consequence, but neither party can violate the binding provisions without exposure. Sellers should pay close attention to binding clauses because they define the rules of engagement during a period when you have limited leverage.

Key Clauses Every LOI Should Address

Purchase Price and Consideration

The LOI should clearly state the proposed purchase price and how it will be paid. Will it be all cash at closing? Will there be an earnout component tied to future performance? Is seller financing involved? Will any portion be held in escrow?

Ambiguity here leads to unpleasant surprises later. If the buyer proposes a $10 million purchase price but $3 million is contingent on an earnout, you need to understand that distinction before signing.

Deal Structure

The LOI should specify whether the transaction is structured as an asset purchase or a stock (equity) purchase. This has significant tax implications for both parties. In asset purchases, the buyer acquires specific assets and liabilities. In stock purchases, they acquire the entire legal entity.

Most buyers prefer asset purchases for tax and liability reasons. Most sellers prefer stock purchases for the same reasons. The LOI is where this negotiation begins.

Exclusivity Period

The exclusivity clause — sometimes called the no-shop provision — prevents you from soliciting or entertaining offers from other buyers for a specified period. This is almost always binding.

Standard exclusivity periods range from 60 to 120 days. Some buyers push for longer. As a seller, you want this period to be as short as reasonably possible. A shorter exclusivity period keeps pressure on the buyer to complete due diligence efficiently and reduces the time your business is effectively off the market.

Be cautious about exclusivity extensions. Some LOIs include automatic extension provisions that can keep you locked in far longer than you anticipated.

Due Diligence Scope and Timeline

A well-drafted LOI defines the scope and timeline for due diligence. What information will the buyer need access to? How long will the process take? What are the milestones?

Without defined parameters, due diligence can drag on indefinitely — and extended timelines almost always benefit the buyer at the seller's expense.

Representations and Warranties

While the detailed reps and warranties will appear in the definitive purchase agreement, the LOI often outlines the general categories. These may include representations about financial statements, legal compliance, material contracts, employee matters, intellectual property, and environmental issues.

Understanding what the buyer expects you to warrant — and what the consequences of a breach might be — should inform your negotiation posture from the LOI stage.

Working Capital and Closing Adjustments

Many LOIs include provisions for working capital adjustments at closing. The buyer will typically set a target working capital level, and any shortfall at closing reduces the purchase price while any surplus increases it.

This is an area where sellers frequently lose value. If the working capital target is set too high, you are effectively giving the buyer a discount. Negotiate the target carefully and ensure the methodology for calculating working capital is clearly defined.

Conditions to Closing

The LOI should outline what conditions must be satisfied before the deal can close. Common conditions include satisfactory completion of due diligence, obtaining necessary consents (landlord approvals, key customer contracts), regulatory clearances, and securing financing.

Pay attention to financing contingencies. If the buyer's ability to close depends on obtaining third-party financing, you bear the risk that the financing falls through. Where possible, seek confirmation that the buyer has committed funding or is well-capitalized.

Employee and Management Matters

Buyers often want key employees to stay on post-closing. The LOI may include provisions about employment agreements, non-compete arrangements, and transition support from the seller. If you are expected to stay involved after the sale, the terms of that involvement should be addressed early.

Sample LOI Outline

While every transaction is different, a comprehensive LOI typically follows this structure:

1. Parties to the transaction
2. Description of the transaction (asset vs stock purchase)
3. Purchase price and form of consideration
4. Earnout or contingent payment terms
5. Working capital target and adjustment mechanism
6. Exclusivity period and terms
7. Due diligence scope, access, and timeline
8. Key representations and warranties
9. Conditions precedent to closing
10. Employee and management transition provisions
11. Non-compete and non-solicitation terms
12. Confidentiality obligations
13. Expense allocation
14. Governing law and dispute resolution
15. Expiration date of the LOI

Negotiation Tips for Sellers

Do not rush. A buyer presenting an LOI may create urgency, but you have every right to take time reviewing it with your advisors. Responding thoughtfully is more important than responding quickly.

Negotiate the exclusivity period down. Shorter exclusivity protects your leverage. If the buyer needs 90 days, push for 60 with a defined extension process rather than an automatic rollover.

Clarify the purchase price composition. A headline number means nothing if 40 percent of it is tied to an earnout with targets you may not control. Understand what you are getting at closing versus what is contingent.

Address working capital early. Disagreements over working capital adjustments are among the most common sources of last-minute deal friction. Define the methodology and target in the LOI.

Ensure the LOI reflects realistic closing conditions. If conditions are too numerous or too vague, the buyer has broad latitude to renegotiate or walk away after you have been off the market for months.

Get professional advice. An experienced M&A attorney and advisor can identify risks in an LOI that may not be obvious to someone going through the process for the first time.

The LOI Sets the Trajectory

The letter of intent is not the finish line — it is the starting line for the most intensive phase of the sale process. But the terms you accept in the LOI will shape every negotiation that follows. A well-structured LOI protects your value, limits your exposure during exclusivity, and sets clear expectations for both parties.

Treat it with the seriousness it deserves.

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