The Letter of Intent, Explained

When a buyer is serious about your business, they'll usually send a letter of intent, often called an LOI. It's the first written outline of the deal. Signing one is a big step, even though most of it isn't legally binding.

Understanding what's in an LOI, and what to watch for, puts you in a much stronger position.

What an LOI is

An LOI is a short document, often a few pages, that lays out the main terms a buyer proposes. Once both sides sign it, the buyer typically begins full due diligence and the attorneys start drafting the final purchase agreement.

Think of it as the blueprint for the deal. Many of the terms will carry straight into the final contract, so it pays to get them right now.

What it usually covers

• Purchase price and how it was determined
• Structure: asset sale or stock sale
• Payment terms: cash at closing, seller financing, earnouts, or rollover equity
• Working capital: the level expected to be left in the business at closing
• Due diligence: what the buyer will review and the timeline
• Your role after closing: how long you'll stay and what you'll do
• Employees: plans for the team, if the buyer addresses it
• Conditions: financing, landlord approval, licensing, or other requirements
• Target closing date

What's binding and what isn't

Most of an LOI is usually non-binding. The price and terms can still change, and either side can typically walk away before the final purchase agreement is signed.

A few sections usually are binding, such as:

• Exclusivity, sometimes called a no-shop clause, which stops you from negotiating with other buyers for a set period
• Confidentiality
• Who pays which expenses

Your attorney should confirm which parts of your specific LOI are binding.

What to look for before you sign

• Specific terms. Vague language around price, earnouts, or working capital leaves room for disputes later.
• A reasonable exclusivity period. You'll be off the market while it lasts. Make sure the time frame is realistic and not longer than needed.
• Financing certainty. Understand how the buyer will pay and how firm their funding is.
• Conditions. Every condition is a possible reason the deal won't close.
• Your future role. Be sure the time commitment matches what you want.
• What isn't mentioned. If something important to you, such as your employees or company name, isn't addressed, raise it now.

Negotiate before you sign, not after

Your leverage is highest before you sign an LOI, because once you agree to exclusivity you can't compare offers. Ask questions, push for clarity, and have your attorney and CPA review the terms first.

Plain terms, clearly written

At Legacy Lion Reserve, our letters of intent spell out price, structure, and your role in plain language, so you and your advisors know exactly what we're proposing. Our article on deal terms explains the most common terms in more detail. When you're ready to talk, reach out.

This article is for general education and is not legal advice. Have an attorney review any letter of intent before you sign.