The letter of intent, explained
A buyer hands you a letter of intent and it feels like the finish line. It isn't. The LOI is where the real deal starts, and a few lines in it can quietly shape everything that follows. Here's what an LOI actually is, which parts bind you, and what to watch before you sign.
What an LOI is, and when it shows up
A letter of intent is a short document, usually a few pages, that a buyer sends once they've decided they're serious about buying your company. It comes after the early conversations and the first informal offers, but before anyone has signed a contract or written a check. Think of it as the moment a buyer says, in writing, "here are the terms I want to do this deal on. Let's stop circling and start working toward a close."
You'll also hear it called a term sheet, an indication of interest, or a memorandum of understanding. The labels differ a little, but the job is the same: put the headline terms on paper so both sides know what they're negotiating toward. The LOI is not the document that sells your business. The purchase agreement does that, and it comes later. The LOI is the handshake that gets everyone to the table.
Timing matters here. The LOI lands right before due diligence. Once you sign, the buyer starts opening up your books, your contracts, and your operations to confirm the business is what you said it was. So the LOI is the last big checkpoint where you still hold the upper hand, because nobody has spent money on diligence yet and you can still walk.
The part that trips people up: binding vs. non-binding
Here's the thing most owners don't realize until it's pointed out. A letter of intent is usually a mix of binding and non-binding terms in the same document, and the difference is everything.
The big commercial terms are typically non-binding. The price, the deal structure, the payment terms: these are a starting point, not a promise. A buyer can put a number in the LOI and then chip away at it later if diligence turns something up. That's normal, and it's why the LOI price should be treated as the opening of a negotiation, not the final word.
A small number of clauses are binding even though the rest of the document isn't. These are the ones that can actually bite you:
| Clause | Usually | What it means for you |
|---|---|---|
| Price & valuation | Non-binding | An anchor, not a guarantee. Can move in diligence. |
| Deal structure & terms | Non-binding | Negotiated into the final purchase agreement. |
| Earnout | Non-binding | Outlined here, detailed and fought over later. |
| Exclusivity (no-shop) | Binding | Locks you into this buyer for a set window. |
| Confidentiality | Binding | Restricts what either side can disclose. |
General information only, not legal advice. The exact wording of an LOI decides what binds you, so have it reviewed before signing.
The lesson: read every line, and don't assume the whole document is "just a formality." The binding clauses are short and easy to skim past, and they're exactly the ones that constrain you.
Key terms to watch
A few items inside the LOI deserve more attention than the rest. These are the ones that quietly decide how good your deal turns out to be.
- Price. The headline number, and the one everyone looks at first. Remember it's an anchor, not a sealed figure. If you went to market without a real sense of what your business is worth, you have no way to know whether the offered price is strong or weak. Knowing your number before the LOI arrives is half the battle.
- Structure: asset sale vs. stock sale. This sounds technical, but it has real consequences for both taxes and liability. In an asset sale, the buyer cherry-picks the assets and often leaves liabilities behind. In a stock sale, they buy the whole entity, warts and all. The two can put very different amounts of money in your pocket after tax, so it's worth understanding which one the LOI proposes and why.
- Earnout. Some deals hold back part of the price and pay it out later, only if the business hits agreed targets after the sale. An earnout can bridge a gap when buyer and seller disagree on value, but it also means part of your money depends on what happens after you've handed over the keys. Watch how it's defined, who controls the levers, and how the targets are measured.
- Exclusivity period. This is the binding clause that locks you into negotiating with this one buyer for a set stretch of time, often a month or two, sometimes more. While the clock runs, you can't shop the deal. Buyers want it long so they can run diligence without competition. You want it short and tied to the buyer making real progress, so a slow or stalling buyer can't freeze you out of the market.
- Escrow. It's common for a slice of the purchase price to sit in escrow for a period after closing, as protection for the buyer if something they relied on turns out to be wrong. The size of that holdback and how long it's held are negotiable, and they affect how much cash you actually walk away with on day one.
Why you shouldn't sign without advice
An LOI looks simple. That's the trap. By the time you sign it, you've usually agreed to an anchor price and locked yourself into exclusivity, and both of those are hard to undo. Sign a soft price and a long no-shop, and you've quietly handed the buyer a strong hand for the rest of the deal.
This is where an experienced advisor earns their keep. A good M&A advisor or business broker has read hundreds of these documents. They'll push back on a low price, tighten or shorten the exclusivity window, flag binding language you'd have skimmed past, and make sure the structure actually works for you and not just the buyer. A deal attorney does the same on the legal side. The cost of getting it reviewed is small next to the cost of signing a weak LOI and discovering it three months later.
The reason this matters so much: your bargaining power is highest right before you sign and drops the moment you do. Spend your strongest moment getting the terms right.
What happens after you sign
Signing the LOI starts the clock on the home stretch. Diligence begins. The buyer and their advisors comb through your financials, contracts, customer relationships, employee situation, and anything else they care about, checking that reality matches the story. Their lawyers draft the purchase agreement, the two sides negotiate the final terms in detail, and any price adjustments tend to surface in this stretch.
If diligence checks out and you agree on the contract, you close and the money moves. If something material turns up, the buyer may push to change the price or terms, which is one more reason the LOI should never feel like the end. It's the start of the most intense part of the process, not the conclusion.
The single best thing you can do to get through this stage cleanly is to have prepared before you ever received an LOI: clean books, documented contracts, a business that doesn't live entirely in your head. If you're earlier than that, our broader guide on how to sell your business walks through the full path, and the value-builder side covers the work that lifts your number before you go to market.
Where ProCloser fits
Most owners only sell a business once. The buyer across the table from you does deals for a living, and they wrote the LOI. That's an uneven matchup, and it's the whole reason to have someone in your corner who reviews these documents all the time.
ProCloser matches business owners with vetted M&A advisory firms, including success-only options with no upfront retainer, so getting an experienced advisor to look at your situation costs you nothing to start. Tell us about your business and we'll connect you with firms that close deals like yours. They can pressure-test an offer, sharpen the LOI, and run the rest of the process so you're not negotiating against a pro on your own. It's free to sellers and confidential.
LOI FAQ
What is a letter of intent when selling a business?
It's a short document a buyer sends once they want to move from casual interest to a real deal. It lays out the headline terms they have in mind: a price or range, how they'd pay, the rough structure, and a timeline. Most of those terms aren't binding on their own. The LOI signals serious intent and gives both sides a framework to negotiate the actual purchase agreement, which is the document that closes the deal.
Is a letter of intent binding?
Usually it's a mix. The commercial terms, like price, structure, and any earnout, are typically non-binding and meant as a starting point. A handful of clauses are almost always binding even when the rest isn't: exclusivity, which locks you into one buyer for a set window, confidentiality, and sometimes who pays certain costs if the deal collapses. Read every line, because the wording decides what actually holds you.
Should I sign an LOI without an advisor or lawyer?
It's risky. The LOI sets the anchor price and locks you into exclusivity, so a weak one is hard to recover from later. An M&A advisor and a deal attorney can push back on price, tighten the exclusivity window, and flag binding language you might have skimmed past. Your leverage drops the moment you sign, so get help before you sign, not after. Get matched with a vetted advisor first.
What is the exclusivity period in an LOI?
Exclusivity, sometimes called a no-shop clause, is a promise that for a set number of days you'll negotiate only with this buyer and stop talking to anyone else. It's one of the binding parts of most LOIs. Buyers want it so they can spend on diligence without worrying you'll sell elsewhere. You want it short and tied to the buyer making real progress, so a stalled deal doesn't freeze you out of the market.
What happens after you sign a letter of intent?
Signing kicks off due diligence. The buyer digs into your financials, contracts, customers, and operations to confirm the business is what you said it was. Their lawyers draft the purchase agreement, the two sides negotiate the final terms, and price adjustments tend to surface here. If diligence checks out, you close and get paid. If something material turns up, the price or terms can change, which is why the LOI should never feel like the finish line.
Have an advisor in your corner first.
We'll match you with a vetted M&A advisor who reviews letters of intent every week, can pressure-test the price, and runs the rest of the process for you. Free to sellers. No retainer to get started, including success-only options.
Tania leads ProCloser's network of vetted M&A advisory firms and works with business owners every week on valuation, fit, and getting matched to the right advisor to sell. Get matched free.