Letter of intent to buy a business: what to put in it
Short answer
A letter of intent (LOI) to buy a business sets out the price, how it's paid, what's included, the timeline for due diligence and closing, exclusivity, and the conditions the deal depends on, such as financing and the lender's valuation. Most of it is non-binding, but exclusivity, confidentiality and sometimes expenses are usually binding.
Treat it as the deal's blueprint. Anything you leave vague in the LOI gets negotiated later, when the seller has less reason to give ground.
The LOI is the first document where your offer stops being a conversation. It usually runs two to five pages. Brokers often have their own template, and that template is written to suit the seller. Your attorney should review it, but you need to know what each term does, because you're the one negotiating it.
The terms, one by one
| Term | What to write | Why it matters |
|---|---|---|
| Parties and structure | Who's buying (usually a new entity you'll form) and whether it's an asset or stock purchase | Drives liabilities, taxes and what transfers. See asset vs stock. |
| Price | A number, and the earnings basis you used | Showing your basis makes later adjustments easier to justify. |
| How it's paid | Cash at closing, SBA loan, seller note (standby or paying, rate, term), any holdback | Structure is often worth as much as price. |
| What's included | Equipment, inventory (at cost, counted at closing), IP, phone numbers, website, customer lists | Prevents "that was never included" surprises. |
| Working capital | Whether receivables, payables and cash stay or go; any peg | One of the most expensive things to leave vague. See working capital peg. |
| Due diligence | Access to records, people, landlord and key customers; the period in days | You can't find problems without access. |
| Exclusivity | Seller won't negotiate with others for a set period | Usually binding. Make it long enough. |
| Conditions | Financing, lender valuation, lease assignment, licence transfers, satisfactory diligence | Your exits if things go wrong. |
| Seller transition | Days or months of training and consulting, paid or included | SBA deals cap seller consulting at 24 months. |
| Non-compete | Scope, geography, years | Protects the goodwill you're paying for. |
| Employees | Who you intend to keep; when staff are told | Avoids a seller promising things you didn't agree to. |
| Binding provisions | Exclusivity, confidentiality, expenses, governing law | Everything else is non-binding. |
Clauses buyers forget
A valuation contingency
Under SBA SOP 50 10 8.1, the lender orders an independent valuation, the price must be supported by it, and anything above it must be covered with equity. Write in that if the valuation comes in below the price, the parties will renegotiate in good faith, and that you can withdraw if you can't agree.
An earnings representation
State the earnings figure your offer relies on (for example, "SDE of $X for the 12 months ending [date], as shown in the seller's recast dated [date]") and that the price assumes it's supported in diligence. When diligence finds the earnings are lower, you've already established that price follows earnings.
No earnout if you're using SBA money
Seller earnouts are prohibited in SBA 7(a) change-of-ownership loans. If you and the seller disagree on future performance, use a seller note or a lower price instead. See earnouts.
Access to the landlord
Get the right to talk to the landlord about assignment during diligence. A landlord who refuses to assign, or wants a big rent increase, can kill a deal late.
A plain LOI outline
Illustrative outline only. Have your attorney draft the real document.
1. Buyer: [New entity to be formed by Buyer]. Seller: [Company name and owners].
2. Transaction: Purchase of substantially all operating assets of the business, free of liens, excluding cash, receivables and all liabilities except those listed.
3. Price: [$ amount], based on seller's discretionary earnings of [$ amount] for the twelve months ending [date] as presented by Seller, subject to verification in diligence.
4. Payment: [$] cash at closing funded by Buyer equity and an SBA 7(a) loan; seller note of [$] at [rate], [full standby / amortizing over N years].
5. Inventory: included at Seller's cost, counted jointly the day before closing, up to [$ cap].
6. Conditions: Buyer's satisfactory due diligence; SBA loan approval; lender valuation supporting the price; landlord consent to assignment on acceptable terms; transfer or reissue of required licences.
7. Diligence and exclusivity: [N] days from signing, with access to records, employees (timing agreed), landlord and key customers. Seller will not solicit or negotiate other offers during this period.
8. Transition: Seller provides [N] weeks of full-time training, then consulting as needed for up to [N] months.
9. Non-compete: Seller will not compete within [area] for [N] years.
10. Binding terms: Sections 7 (exclusivity), confidentiality, expenses and governing law are binding; all other terms are non-binding until a definitive agreement is signed.
Before you send it
- Your lender has seen the deal and the structure works for them.
- You've checked the earnings against tax returns and bank deposits, at least roughly. See proof of cash.
- You know the lease terms.
- Your attorney has reviewed the binding clauses.
- Your exclusivity period fits a realistic diligence and financing timeline.
How to make an offer to buy a business
Make an offer to buy a business in writing, after you've seen enough financials to check the earnings. Start with a short indication of interest or go straight to a letter of intent covering price, structure (cash, loan, seller note), what's included, diligence period, exclusivity and key conditions. Show how you got to the price: the verified earnings figure and the financing it supports.
Sellers accept lower numbers more readily when the reasoning is documented and respectful.
An offer is a negotiation and a first impression at the same time. The seller will judge you as much as the number.
Before you offer
- You've seen three years of tax returns and recent financials.
- You've rebuilt SDE and rated the add-backs. See add-backs.
- You've checked deposits against revenue, at least roughly.
- Your lender has seen the deal and the structure works.
- You know the lease terms.
What to put in it
Illustrative offer summary (attach to or include in your LOI)
We propose to purchase the assets of [business] for [$ price].
Basis: Our review of the tax returns for [years] and bank statements supports seller's discretionary earnings of approximately [$]. The difference from the listing reflects [specific add-backs we could not verify, e.g. vehicle and family payroll], which we're happy to revisit with supporting documents.
Structure: [$] at closing (buyer equity and SBA 7(a) loan); seller note of [$] on [terms]; inventory at cost per joint count.
Conditions: due diligence, financing, lender valuation supporting the price, lease assignment.
Timeline: [N] days of diligence and exclusivity; target closing [date]. This offer is open until [date].
After you send the LOI, give the seller a reasonable window to respond and offer to walk them through it on a call. Most sellers have never read one, and a ten-minute explanation of what is binding and what isn't can save a week of worried emails.
Keep the LOI short. Long LOIs invite early fights over terms better left to the purchase agreement.
Frequently asked questions
Is a letter of intent to buy a business legally binding?
Usually only in part. The business terms (price, structure) are normally stated as non-binding, while clauses such as exclusivity, confidentiality, governing law and who pays expenses are written to be binding. Your attorney should make the split explicit.
How long should exclusivity last?
Long enough to finish diligence, get financing approved and draft the purchase agreement. With an SBA lender ordering a valuation (and a QoE at $3 million and up), that's often longer than sellers first propose. Ask your lender for their timeline before you set the date.
Should the LOI mention the SBA valuation?
If you're using an SBA loan, yes. The lender's valuation must support the price, and any excess has to be covered with equity. A clause saying the price will be revisited if the valuation comes in lower protects you.
Can I back out after signing an LOI?
Generally yes, if the LOI makes the deal terms non-binding and you haven't breached a binding clause such as exclusivity or confidentiality. Walking away for a diligence finding is exactly what the non-binding structure is for.
Should I offer below asking price?
Offer what verified earnings and financing support. If the asking price relies on add-backs that don't hold up, explain that specifically.
What's an indication of interest (IOI)?
A short, non-binding letter giving a price range and key terms, used to see whether the seller wants to proceed before a full LOI. More common in larger deals.
Sources
- SBA SOP 50 10 8.1, Appendix 15 (valuation, equity, earnouts, seller transition)
- IRS Form 8594, Asset Acquisition Statement
Related guides
General information, not legal, tax, financial or investment advice. Rules and lender practices change; check the linked sources and talk to your attorney, CPA and lender about your deal. Examples with named numbers are illustrations, not real businesses. OKtoBuy's Deal Check does not value businesses or give price opinions.