Letter of intent to purchase a business: what's in it and what to negotiate

What is a letter of intent when you sell a business?

A letter of intent (LOI) is the buyer's written offer. It sets out the price, how it will be paid and the main terms, so both sides agree the shape of the deal before lawyers draft the purchase agreement, the final contract.

It usually arrives after the buyer has seen your numbers under a confidentiality agreement. Once you sign, the buyer starts due diligence, which means checking everything you have told them, while the lawyers draft the purchase agreement. If diligence goes well, the sale closes.

What is in a letter of intent?

Term	What it says	A question to ask
Price	The headline number and what it covers	What is it based on? Does it include inventory, vehicles or real estate?
Assets or stock	Whether the buyer buys the business's assets or the company's shares. See asset sale vs stock sale	How does this change my tax?
Cash at close	The part of the price paid on closing day	What share of the price is that?
Seller note	Part of the price you lend the buyer and are repaid over time. See seller financing	What are the rate, term and security? What happens if a payment is missed?
Earn-out	Part of the price paid only if the business hits targets after the sale. See earn-outs	How are targets measured, and who runs the business meanwhile?
Working capital	Money tied up in day-to-day running: unpaid customer invoices and inventory, less unpaid bills. The LOI sets a target level, and the price moves if the level at closing differs (a working capital peg)	Is cash included? How is the target set and measured?
Financing condition	The deal depends on the buyer getting a loan	By what date? What happens if the loan falls through?
Due diligence period	The time the buyer has to check the business	What will they ask for, and when must they finish?
Exclusivity	You agree not to talk to other buyers	How many days? Can it be extended without my consent?
Your role after the sale	Training the buyer or staying on for a set time	For how long, doing what, and paid how?
Other terms	Lease or premises, employees, closing date, who pays costs	What happens to my lease and my team?
Non-compete	A promise not to compete for a set time and area	How long, how wide, and what counts as competing?

Which parts of a letter of intent are binding?

Price, structure and timeline usually do not bind. Exclusivity and confidentiality normally do, and some LOIs add a break fee (money one side pays if the deal falls through) or expense reimbursement (one side covers the other's costs if the deal ends). BD Emerson, an advisory firm, and Norris McLaughlin, a law firm, both say these clauses can be enforced even when the LOI calls itself non-binding.

So "non-binding" does not mean you are free to talk to another buyer: if there is an exclusivity clause, assume it applies. BD Emerson adds that courts have occasionally found obligations in documents labeled non-binding where both sides acted as if a deal existed. Which clauses bind you depends on the exact wording.

How long should exclusivity last?

BD Emerson, writing about larger company sales, describes 60 to 90 days as standard, and 120 for complex carve-outs (selling a division of a company). It suggests milestones, for example a draft purchase agreement by day 30 and diligence finished by day 60. Deals your size can differ, so ask what is usual for your type of business.

Corum Group, another advisory firm, advises sellers to limit exclusivity, and to try to agree a penalty, such as the buyer losing exclusivity, if the buyer reopens the price on unfounded or minor claims.

How much of the price do sellers get in cash at closing?

In the Market Pulse survey for the second quarter of 2026, run by the International Business Brokers Association (IBBA) and M&A Source, 255 brokers and advisors reported 181 completed deals. Sellers received 83% to 92% of the deal value in cash at close on average. By deal-size band, from the survey's highlights chart:

Business value	Cash at close	Seller financing
Under $500K	88%	11%
$500K to $1M	92%	6%
$1M to $2M	91%	7%
$2M to $5M	84%	9%
$5M to $50M	83%	6%

Earn-outs were about 1% of deal value under $5M and 7% from $5M to $50M. So at most sizes, most of the price arrives at closing. That is an average, not a rule. If an LOI defers a much larger share, ask why and what you get for waiting.

If your buyer is using an SBA loan

Loans backed by the U.S. Small Business Administration (SBA) are a common way to finance a business purchase. The SBA's rulebook for lenders, SOP 50 10 8.1, says changes of ownership are among the largest categories of its 7(a) lending (7(a) is its main small-business loan program). The rulebook limits what the lender can fund for a purchase, so it limits what the LOI can say.

The earn-out ban, the debt limit and the valuation rule below apply to every 7(a) loan used to buy a business, including a sale to a long-time employee. The limit on your role afterwards and the quality of earnings report apply only when the buyer is a new owner or another company. For the full picture, see selling to a buyer with an SBA loan.

• No earn-out. Seller earn-outs are prohibited.
• Your role after the sale. You cannot stay on as an officer, director, stockholder or employee. The buyer's company can hire you as a consultant for up to 24 months in total, extensions included.
• Seller note on standby. A seller note can count toward the buyer's required equity (their own money in the deal) only if it is on full standby: no payments of principal or interest for the whole term of the SBA loan. A loan to buy a business can run up to 10 years, so you may be paid nothing for years.
• Seller note and the lender. The lender is paid first from the same collateral (the assets pledged to back the loan), and you cannot act against the buyer without the lender's consent. A note not on full standby counts as debt, and total debt is capped at the business valuation.
• The price needs backing. For a business price above $350,000, the lender must get its own business valuation (an expert's estimate of what the business is worth) from an independent accredited appraiser, and it must support the price. At $350,000 or less it may do its own, unless buyer and seller have a close relationship. A valuation you commissioned will not do. The buyer covers any gap with equity.
• A closer look at earnings from $3 million. When the business price is $3 million or more, not counting a building the buyer will operate from, the lender must also get a quality of earnings report: an independent financial professional's check of what the business really earns, prepared for the lender and not for you.

Can the buyer lower the price after the letter of intent?

It can happen. The price usually does not bind the buyer, and it rests on what the buyer has seen so far, which due diligence then tests. Corum Group says price cuts after the LOI, sometimes called retrades, usually come during diligence, and names missed revenue forecasts, quality of earnings concerns, legal or tax surprises and hidden expenses as triggers.

Preparation before the LOI can reduce the surprises a buyer finds: earnings backed by paper, a clear view of any large customer, and leases and licenses you have read yourself. See the documents buyers and lenders ask for.

Before you sign

• A lawyer who handles business sales has read the whole LOI.
• Your CPA has looked at asset sale versus stock sale, and at how the price is divided among equipment, inventory and goodwill (value beyond the physical assets, such as your name and customers). When an asset sale covers a whole business and goodwill could attach, buyer and seller generally each file IRS Form 8594, which reports that split.
• You have compared offers on the cash you would actually receive and how certain it is, not just the headline price.
• Exclusivity is as short as you can get, with milestone dates and a clear end.
• Working capital is defined, with the method for measuring it, not just "normal level".
• Any seller note states its rate, term, security and what happens on a missed payment, and the non-compete states its length, area and scope.
• If the buyer uses an SBA loan, there is no earn-out. For a new owner or another company, your role afterwards is consulting for 24 months or less.
• You know who pays which costs, including if either side walks away.

What to do next

Before any LOI arrives, write down three must-haves: the share of the price you need in cash at close, the longest exclusivity you will accept, and the role, if any, you will take after the sale. With those on paper, an offer is easier to judge calmly.

Keep reading

• Asset sale vs stock sale: what's the difference when you sell a small business?
• Seller financing when you sell a business: how a seller note works
• What is an earn-out when you sell your business?
• Documents needed to sell a business: the due diligence list

This guide is general information, not tax, legal or valuation advice. Every business is different: talk to your accountant, lawyer and broker about yours.