Letter of Intent for Buying a Business: Complete Guide + Free Template

The letter of intent is the document where a deal stops being a conversation.

Up to that point, you and the seller have been talking. After it's signed, your transaction attorney has work to do, the seller's broker has a clock running, and your SBA lender has a starting gun for underwriting. Most first-time buyers treat the LOI as paperwork — something to draft fast and move past. The buyers I've worked with who got hurt almost always got hurt by language inside the LOI they didn't read carefully enough.

This post walks through what an LOI is, what's in one, what's binding versus not, and what every section is actually negotiating about. There's a free template at the bottom. Use it as a starting structure, not as a finished document.

What is a letter of intent

A letter of intent (LOI) is a written agreement between a buyer and seller that establishes the proposed terms of a business sale before the parties sign a definitive purchase agreement.

In SMB acquisitions, the LOI does three things:

1. Locks in the headline economics. Purchase price, structure (cash vs. seller note vs. earn-out), and target close date.
2. Buys the buyer time and access. A defined due diligence period during which the buyer can review financials, talk to customers, and order a quality of earnings report.
3. Buys the buyer exclusivity. A period — typically 45 to 90 days — during which the seller agrees not to negotiate with other buyers.

The LOI is mostly non-binding. The price and structure are subject to whatever due diligence reveals. But several specific clauses inside the LOI are binding from the moment both parties sign, and the cost of overlooking them is real.

When you send an LOI

The LOI lands after the buyer has reviewed the seller's confidential information memorandum (CIM), had at least one in-depth call with the seller, and decided this is a deal worth committing legal and financing resources to.

In a typical SMB acquisition timeline:

• Week 1: Buyer signs NDA, receives CIM
• Week 2-3: Buyer reviews CIM, books seller call, requests Q&A
• Week 4-5: Buyer drafts and submits LOI
• Week 6-12: Due diligence runs under exclusivity
• Week 10-14: SBA underwriting (parallel to DD if pre-qualified)
• Week 12-16: Definitive agreement (APA or SPA) drafted, signed, closed

The LOI is the inflection point. Before it, both sides can walk for any reason. After it, walking has costs.

The 9 sections every LOI needs

There's no legally required structure for an LOI, but a complete one for an SMB acquisition includes these nine sections.

1. Parties and assets being acquired

Names of the buyer entity (usually a newly-formed acquisition LLC) and the seller entity. A clear statement of what's being purchased: assets only (asset purchase) or equity (stock purchase). For asset purchases, an explicit list of what's included (equipment, inventory, customer contracts, intellectual property, goodwill) and what's excluded (cash, AR up to a date, owner's personal vehicle, the building if leased back).

The seller's lawyer cares deeply about excluded liabilities here. Your lawyer cares deeply about the included assets list being complete.

2. Purchase price and structure

The headline number plus the structural breakdown:

• Cash at close — what the buyer brings in equity plus what the SBA lender is funding
• Seller note — typical structure for SBA deals is 10% of purchase price held back as a seller note, often standby for the first 24 months
• Earn-out — contingent payments tied to post-close performance (revenue, EBITDA, customer retention)
• Stock or equity rollover — rare in SMB deals but appears in larger transactions

A clean LOI shows the breakdown explicitly. A purchase price of $2.1M might look like:

• $1.6M cash at close (12% buyer equity, 88% SBA 7(a))
• $210K seller note, 24-month standby, 7% interest
• $290K earn-out over 36 months tied to revenue retention

3. Financing contingency

This is where most SBA-financed LOIs fail or succeed. The clause needs to specify:

• The buyer's intent to obtain SBA financing (or alternative)
• The minimum loan terms acceptable (rate, term, amortization)
• The right to walk if financing isn't approved within a defined window
• What happens to deposits if financing falls through

Without a financing contingency, a buyer who can't close because the SBA denied the loan may still owe expense reimbursement and lose any deposit.

4. Due diligence period and access

The window — typically 45 to 75 days — during which the buyer can:

• Review the last 3-5 years of tax returns and financials
• Order a quality of earnings (QoE) report
• Interview key employees
• Speak to the top 5-10 customers (under controlled conditions)
• Inspect physical assets and lease the premises
• Review all material contracts

The LOI should specify what counts as "reasonable access" and within what business hours, and whether customer conversations require the seller's pre-approval (they usually do).

5. Exclusivity / no-shop

The seller's commitment not to negotiate with other buyers during the LOI period.

For SMB deals, exclusivity typically runs:

• 30-45 days for cash deals with no SBA financing
• 60-75 days for standard SBA-financed deals
• 75-90 days for complex deals (multiple sellers, real estate component, regulated industries)

The clause should also specify what happens if the buyer drops out: does exclusivity end immediately, or does the seller have to wait for written notice? A poorly-drafted exclusivity clause can keep the seller off-market for months after the deal has effectively died.

6. Confidentiality

Reaffirms the NDA terms. Names what counts as confidential information and how it can be used during DD. Importantly, this is binding — it survives the LOI's termination.

7. Expense reimbursement and break-up provisions

The clause buyers most often miss.

A standard SMB LOI includes some version of: if the buyer walks outside of the financing contingency or due diligence findings, the buyer reimburses the seller's transaction expenses up to a cap (typically $25K-$75K for deals under $5M).

The cap is binding. The walk-away rights inside DD are not. So the negotiation in this section is really about what counts as a legitimate DD-based walk: is it any concern the buyer raises, or only material findings supported by a QoE? Sellers want the latter; buyers want the former.

8. Closing conditions and target close date

What needs to happen for the deal to close:

• Definitive purchase agreement executed
• Financing closed and funded
• All representations and warranties accurate as of close
• No material adverse change in the business
• Required third-party consents obtained (lease assignments, customer change-of-control)
• Lien searches complete and satisfactory

The target close date is a target, not a commitment. Most LOIs allow either party to extend by 30 days if working in good faith.

9. Expiration of the LOI itself

The date by which both parties must sign or the LOI auto-terminates. Typically 5-10 business days from the buyer's submission date. Forces the seller to engage promptly rather than shopping the LOI to other buyers.

Binding versus non-binding — what every buyer gets wrong

Most of the LOI is non-binding. Specifically, price, structure, and timeline are all subject to revision during diligence and replacement by the definitive agreement at close.

Specifically binding clauses survive the LOI regardless of whether the deal closes:

• Confidentiality — you can't use seller information you saw during the process
• Exclusivity / no-shop — the seller can't shop the deal during the period
• Expense reimbursement — the buyer pays seller costs if walking outside permitted carve-outs
• Break-up fee — flat amount paid if the buyer walks
• Governing law and venue — what state's law applies and where disputes are heard

The expensive buyer mistake: signing an LOI that has a $50K expense reimbursement clause, doing six weeks of diligence, finding something the seller's lawyer argues is not "material" enough to walk on, and either having to close the deal or pay $50K to walk.

The fix is never to skip these clauses — they're standard — but to negotiate the language in the diligence-walk carve-out so that any reasonable concern raised in writing counts as legitimate, not just material adverse findings supported by a QoE.

LOI versus term sheet versus APA

The three documents people confuse:

In SMB acquisitions, the term sheet stage is usually skipped. The buyer drafts an LOI directly after CIM review and seller calls. The LOI then gets replaced at close by either:

• An Asset Purchase Agreement (APA) if the buyer is buying assets only (most SMB deals)
• A Stock Purchase Agreement (SPA) if the buyer is buying equity (less common; usually for tax reasons)

Three LOI examples — annotated

Example 1: All-cash deal, no SBA, $1.2M commercial cleaning company

A self-funded buyer offers all cash. Structure is simple:

• Purchase price: $1.2M, 100% cash at close
• No financing contingency
• Due diligence period: 30 days
• Exclusivity: 30 days, matching DD
• Expense reimbursement cap: $15K
• Target close: 45 days from LOI signing

Self-funded all-cash deals get the shortest LOI. The diligence and exclusivity periods are short because there's no lender underwriting cycle to accommodate.

Example 2: SBA 7(a) financed, $2.1M commercial cleaning company

The most common SMB LOI shape:

• Purchase price: $2.1M
• $1.7M cash at close (15% buyer equity, 85% SBA 7(a) — ten-year term, prime + 2.75%)
• $210K seller note, 24-month standby, 7% interest
• $190K working capital adjustment at close (target $190K, true-up at 60 days post-close)
• Financing contingency: SBA approval within 60 days
• Due diligence period: 60 days, parallel to SBA underwriting
• Exclusivity: 75 days
• Expense reimbursement cap: $35K
• Target close: 90 days from LOI signing

The 75-day exclusivity gives both the SBA underwriting (30-45 days after lender accepts the file) and the QoE work (4-6 weeks) time to run in parallel.

Example 3: Earn-out structure, $4M HVAC company

Where complexity creeps in:

• Purchase price: $4M
• $2.4M cash at close (20% buyer equity, 80% SBA 7(a))
• $400K seller note, 36-month standby, 8% interest
• $1.2M earn-out over 36 months, tied to gross revenue retention
  • Year 1: $400K paid if revenue ≥ 95% of trailing twelve months at close
  • Year 2: $400K paid if revenue ≥ 90% of TTM at close
  • Year 3: $400K paid if revenue ≥ 90% of TTM at close
• Earn-out acceleration on change of control or seller key-employee departure
• Due diligence period: 75 days (extra time for customer interviews and HVAC contract review)
• Exclusivity: 90 days
• Expense reimbursement cap: $75K (higher because the deal is larger and DD is more involved)

Earn-out language is where deals fall apart between LOI and close. The LOI should establish the concept (revenue threshold, payment timing, acceleration triggers); the APA establishes the precise calculation methodology and dispute resolution.

Common LOI mistakes that kill deals

After watching dozens of SMB LOIs unravel, four mistakes show up over and over:

1. Submitting the LOI before reading the CIM carefully. Buyers anchored on the broker's verbal price submit LOIs at a number that doesn't survive a real review of customer concentration or working capital trends. Better: do the math first, send an LOI you can defend.

2. Skipping the financing contingency or writing it loosely. "Subject to financing" is not a financing contingency. The clause needs to specify minimum acceptable loan terms and a defined deadline. Otherwise the seller can argue you're just stalling.

3. Underestimating exclusivity duration. A 30-day exclusivity on an SBA-financed deal forces a hurried QoE and a stressed underwriting process. Push for 60-75 days. Sellers who refuse are signaling they don't believe the deal will close.

4. Ignoring the expense reimbursement cap. If the cap is $50K, the buyer should be 95% confident the deal is closing before signing. The fix isn't to remove the clause (sellers won't accept that) but to negotiate hard on the diligence-walk carve-out language.

Free LOI template

You can download a basic LOI template structured for SMB acquisitions under $5M. It covers all nine sections, with sample language for SBA-financed deals.

Download the LOI template →

The template is a starting structure, not a finished document. Before sending an LOI to a seller, have a transaction attorney review:

• The financing contingency language
• The exclusivity period and termination provisions
• The expense reimbursement cap and diligence-walk carve-outs
• Any earn-out conceptual language

Total legal review for an LOI on a deal under $5M typically runs $500-$2,500. A well-reviewed LOI saves multiples of that during the APA negotiation.

After the LOI: what happens next

Once the LOI is signed by both parties, four parallel tracks start:

1. Due diligence — buyer's review of financials, contracts, customers, and operations. Quality of earnings report typically ordered in week 1 of DD.
2. SBA underwriting — if applicable, the lender has the LOI and can begin formal underwriting. Personal financial statements, three years of business and personal tax returns, and the QoE all feed in.
3. Definitive agreement drafting — buyer's attorney drafts the APA or SPA, typically beginning in week 3-4 of DD when major findings are known.
4. Third-party consents — lease assignments, key customer change-of-control consents, software license transfers all start working.

Most deals that survive 30 days of DD survive to close. Most deals that die, die in the first 30 days when DD reveals something the buyer didn't expect from the CIM. The LOI is what gives you the time to find out.

For background on how to read the CIM that precedes the LOI, see our confidential information memorandum guide. For the financing math that determines whether your LOI price actually clears DSCR, see our forthcoming SBA loan calculator and DSCR walkthrough.