What Does a Letter of Intent Do in a Business Sale?

What is a letter of intent?

A letter of intent is a short agreement, usually 2 to 5 pages, that records the key business terms of a proposed sale: purchase price, deal structure, payment terms, exclusivity period, and target closing date. It frames the transaction before full legal drafting begins.

Think of the LOI as the blueprint for the deal. It answers the big questions, how much, in what form, by when, so the lawyers can build the definitive purchase agreement on a settled foundation instead of negotiating structure and price at the same time.

For a founder selling the company they built, the LOI is also the moment the sale becomes real. Signing one usually means opening the books to a buyer, so the decision to sign deserves the same care as the terms inside it.

Which parts of an LOI are binding?

The price, structure, and closing terms of an LOI are typically non-binding statements of intent. The provisions that bind both parties are usually exclusivity, confidentiality, governing law, and each side's responsibility for its own expenses.

A well-drafted LOI states explicitly which sections bind and which do not. Ambiguity on this point is the most common LOI drafting failure, because a buyer or seller can end up committed to terms they believed were still open, or free to walk from terms they believed were locked.

Non-binding does not mean meaningless. The LOI's terms set the anchor for everything that follows, and a party who tries to move materially off the LOI price or structure during drafting spends negotiating capital and goodwill to do it. Clear, deliberate LOI terms prevent those disputes from arising at all.

What terms should an LOI include?

A complete LOI covers purchase price and how it is paid, whether the deal is an asset or equity sale, exclusivity, confidentiality, key conditions to closing, the due diligence period, treatment of employees, and a target closing date.

The right level of detail is a judgment call. Too thin, and the parties discover fundamental disagreements months into drafting. Too thick, and the LOI negotiation drags on while the deal loses momentum. The goal is to lock the terms that would kill the deal if left open and defer the ones that will not.

• Purchase price and payment form: cash at closing, seller financing, or an earnout, which is a portion of the price paid later based on the business hitting agreed performance targets
• Deal structure: an asset sale or an equity sale, settled before drafting begins
• Exclusivity period and its length, commonly 60 to 90 days
• Confidentiality obligations covering the deal and the diligence materials
• Major closing conditions: financing, license transfers, key third-party consents
• Due diligence scope and timeline
• Expected treatment of employees and the seller's post-closing role, if any
• Target closing date and expense allocation

What does exclusivity mean in an LOI?

Exclusivity, also called a no-shop provision, is the seller's binding promise not to negotiate with other buyers for a set period, commonly 60 to 90 days. It protects the buyer's investment in due diligence, legal work, and financing.

Exclusivity is the buyer's most valuable LOI term and the seller's biggest concession. A buyer will spend real money on accountants, lawyers, and lenders during diligence, and no rational buyer spends it while the seller keeps shopping the company.

Sellers protect themselves by keeping the period as short as practical and by tying it to buyer performance, so exclusivity ends early if the buyer misses agreed milestones such as delivering a draft purchase agreement or a financing commitment. A stalled buyer holding a seller off the market for months is a preventable problem, and the LOI is where it gets prevented.

Can you negotiate after signing an LOI?

Yes. The non-binding terms of an LOI remain open until the definitive purchase agreement is signed, and due diligence findings routinely reshape price and terms. In practice, though, the LOI sets strong expectations that are costly to move without new facts.

The honest way to think about it: everything is negotiable after the LOI, but nothing is free. A buyer who finds a real problem in due diligence has legitimate grounds to adjust price or terms. A buyer who simply rethinks the number erodes trust, and trust is the asset that carries a deal of this size to closing.

This is why the LOI deserves legal review before signature, not after. It costs far less to negotiate a term into a two-page LOI than to claw it back from a signed one.