What is a Letter of Intent (LOI)?
A letter of intent, or LOI, sets out the proposed business deal before the parties spend substantial time and money on due diligence and definitive agreements. For a seller, the number at the top of the offer is only the beginning. The LOI should also explain what the buyer receives, how the price will be paid, what must happen before closing, and how long the seller will be committed to this buyer.
Most business sale LOIs say that the proposed purchase itself is nonbinding. Some provisions—often confidentiality, exclusivity, expenses, and governing law—may be binding immediately. The document should identify those provisions clearly, and both parties should understand them before signing.
Price and Transaction Structure
State whether the buyer proposes an asset purchase or a stock or ownership interest purchase. This choice affects what transfers, what obligations may remain, and the tax issues each side needs to review. Identify the buyer and seller correctly, particularly when the operating business, real estate, and intellectual property are held by different entities.
Spell out the purchase price and the proposed sources of payment: cash at closing, third-party financing, a seller note, an earnout, or any other deferred amount. If a portion is contingent on future performance, describe the measure, period, and basic payment mechanics. A seller should also understand how much cash the buyer expects to contribute and what evidence of funding or lender progress the buyer can provide.
What is Included in the Sale
The LOI should say which assets and obligations transfer. Address equipment, vehicles, inventory, customer relationships, contracts, websites, domain names, phone numbers, trademarks, and other important intangible assets. Equally important, identify excluded assets and explain whether the seller retains cash and accounts receivable and whether the buyer assumes any accounts payable or other liabilities.
Define how inventory will be counted and valued, when the count occurs, and whether a stated amount is included in the price or paid in addition to it. If the buyer expects a specified level of working capital at closing, describe the target and adjustment method. These provisions can materially change the proceeds a seller receives even when the headline price stays the same.
Diligence Financing and Approvals
Set a realistic due diligence period, what information the buyer may review, and any limits on contacting employees, customers, vendors, or the landlord. Identify financing conditions and important third-party approvals, including a lease assignment or new lease, licenses, franchise approval, and contract consents when applicable. The LOI should say when those efforts begin and who is responsible for pursuing them.
If there is an earnest-money deposit, specify its amount, the escrow holder, the payment deadline, and the circumstances in which it is refundable or released. A larger deposit alone does not protect the seller if it remains refundable until the buyer decides to walk away.
Exclusivity and the Route to Closing
An exclusivity provision may prevent the seller from discussing a sale with other buyers while one buyer investigates the business. That is a meaningful commitment. State when exclusivity starts, when it ends, and whether it expires if the buyer misses agreed milestones. Avoid an open-ended period that leaves the business off the market while financing or diligence stalls.
Include a target date for the definitive purchase agreement and closing, with enough time for financing and required approvals. Address who bears transaction expenses, how prorations are handled, and whether the sale includes real estate or a separate lease. If the owner will assist after closing, describe the expected transition period, time commitment, and any paid consulting work beyond the initial handoff.
Restrictions Taxes and Binding Terms
If the buyer requests a seller noncompete or non-solicitation agreement, the LOI can outline the expected duration, area, and activities covered. The final language should be tailored to the transaction and applicable law. For an asset sale, the parties should also discuss purchase-price allocation with their tax advisers; the agreed allocation can affect each side’s tax treatment and reporting.
Texas buyers should consider the state’s Certificate of No Tax Due before closing a qualifying business purchase. The Texas Comptroller explains that a buyer can face successor liability for unpaid state taxes if the required certificate is not obtained before the sale closes. The definitive agreement and closing process should assign responsibility for requesting it.
Finally, distinguish the proposed nonbinding deal terms from any provisions that take effect upon signing. Specify the LOI’s acceptance deadline, how binding provisions end, and which law governs them. A statement that “this LOI is nonbinding” can be misleading if other paragraphs impose immediate duties.
When AI Drafts the Letter of Intent
More buyers and sellers are using artificial intelligence (AI), such as ChatGPT, to draft LOIs—sometimes without an attorney preparing the first draft. AI can help organize an offer and identify terms to discuss, but its use in transaction drafting is still developing. An AI-generated LOI may sound complete while leaving important deal points unclear or introducing terms that do not fit the transaction. Thus, it is important to always review and revise the copy.
Over-reliance on AI can create problems when either party assumes that polished wording means the deal has been fully thought through. Read every provision against the transaction you actually intend, especially terms that may be binding before closing. An experienced M&A advisor can help identify business issues, and a transaction attorney can advise on the legal effect of the language. Take care with confidential business information entered into an AI service.
A Practical LOI Checklist
Before signing, make sure the LOI answers these questions:
- Parties and structure. Who is buying and selling, and is this an asset or ownership interest sale?
- Price and payment. What is paid at closing, financed, deferred, or contingent?
- Included items. Which assets, inventory, contracts, and real estate rights transfer?
- Excluded items and liabilities. Who keeps cash and receivables, and which obligations are assumed?
- How are inventory, working capital, deposits, and prorations calculated?
- Diligence and funding. What may the buyer review, by when, and what approvals or financing are required?
- Who holds it, and when is it refundable or forfeited?
- How long is the seller off the market, and what milestones apply?
- Closing and transition. What are the target dates, costs, and owner support terms?
- Binding provisions. Which terms take effect now, and when do they expire?
The Value of Getting It Right Early
A useful LOI is detailed enough to reveal important differences in expectations without trying to become the final purchase agreement. The goal is to learn whether the parties agree on the business terms before they invest further in the transaction. Sellers should evaluate the certainty and net value of an offer, not just its stated price.
Gateway Mergers & Acquisitions helps business owners compare offers, negotiate the practical deal terms, and coordinate the process with legal, tax, and lending advisers. Contact us today for a free benchmark valuation, to see what your business is worth and get a jump start to the sale of your business!