What a Letter of Intent Actually Commits You To

Signing a letter of intent commits you to a process with one buyer. It does not commit you to selling your business. Most of the document records what the buyer intends. A few clauses bind you from the day you sign.

The short version

An LOI is a short written record of a deal that does not exist yet. Most run two to five pages. The purchase agreement comes later, after the buyer checks the business. That later document is the one with full legal force.

So the LOI has two layers. One layer is intent, and it can change. The other layer is conduct, and it binds now. Owners tend to read the price first and the conduct clauses last. Read them the other way around.

What is usually binding

Most drafts say in plain words which clauses are binding. Two show up on the binding side of almost every LOI.

• Confidentiality. What you discuss stays private. The records you hand over stay private as well. This clause usually survives even if the deal ends.
• Exclusivity. You stop speaking with other buyers while this buyer does diligence. The clause is often called a no-shop clause. In small business sales the window typically runs 45 to 90 days. The length is set before you sign, so negotiate it then.

Picture an owner who signs on a Monday. Two rival buyers call that same week. Exclusivity means those calls wait until the window closes or the first buyer walks away.

Some drafts also make each side pay its own costs. A few add a promise to negotiate in good faith. Ask your attorney to name every binding clause in your draft before you sign.

What is usually not binding

The headline terms sit on the other side of the line. They describe a deal both sides expect, and either side can still walk away.

• The price. The number reflects what the buyer believes the business earns today. Belief is not a promise. Diligence tests the number before anyone is bound to it.
• The structure. How much arrives as cash and how much rides on a note is still a proposal at this stage. The split often moves as the buyer firms up financing.
• The closing date. Treat the date as a target. It slips when a lender or a landlord takes longer than planned.

These terms harden only inside the purchase agreement. Until both sides sign that document, there is no sale to enforce.

The terms that matter more than the headline price

Price gets the attention, but four quieter terms decide what you actually keep. Read each one before you react to the number.

• Cash at close versus a seller note. Cash at closing is money in hand. A note pays across future years, and it depends on the business holding up. Ask what share of the price lands on day one.
• The transition period. Most buyers want the owner to stay and hand over relationships. Ask how many months they expect. Ask whether that time is paid. Unpaid months are part of the price you accept.
• Working capital. Buyers expect the business to arrive able to run on a normal day. That means enough cash in the account and enough stock on the shelf. Make the LOI say what normal looks like in dollars.
• Closing costs. The draft should say who pays each cost. Each side usually pays its own attorney. Lender fees should be named as the buyer's cost. Transfer taxes should be named too, not left for closing day.

Questions to ask before you sign

Four questions will surface most of what an LOI leaves unsaid. Ask them before the signature, while every term is still open.

• How long is exclusivity? Match the window to the work the buyer must finish. A simple business rarely needs the long end of the typical range.
• What happens if the buyer walks away? Ask what you get back and what you lose. You cannot recover the weeks, but you should recover your market.
• What information will you ask for first? The first request shows how prepared the buyer is. Expect tax returns early. Expect bank statements early too.
• When do my staff find out? Most owners keep a sale quiet until the end is near. Agree now on who tells the team. Agree on what staff are told when diligence visitors walk the floor.

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