Key Insight
The LOI is the deal. By the time you're negotiating the purchase agreement, the major terms are largely locked — which is why every word in the LOI deserves more scrutiny than most buyers give it.
What the LOI Establishes
A standard acquisition LOI covers:
- Purchase price — Total consideration, whether all-cash or structured (with seller financing, earnout, or equity rollover)
- Deal structure — Asset sale or stock sale
- Exclusivity period — How long the seller agrees not to shop the deal to other buyers (typically 30-90 days)
- Conditions to closing — Financing contingency, due diligence completion, key employee retention
- Working capital target — The expected level of net current assets to be delivered at closing
- Deposit or earnest money — Refundable vs. non-refundable, and trigger conditions
- Timeline — Target closing date
What "Non-Binding" Actually Means
Most LOI provisions are explicitly non-binding — either party can walk away. But two provisions are typically binding:
- Exclusivity / no-shop clause — The seller cannot negotiate with other buyers during the exclusivity window. This is binding and enforceable.
- Confidentiality — Both parties agree to keep deal terms and due diligence findings confidential.
Beyond these, courts have found implied obligations in LOIs, particularly around good-faith negotiation. "Non-binding" is not a blank check to renegotiate aggressively after exclusivity is granted.
Common Mistakes in LOIs
Underspecified working capital targets — If the LOI says "working capital at closing will be normalized" without specifying what normalized means, expect a fight at the finish line. Specify a dollar amount or a trailing-average methodology.
Vague earnout definitions — If there's an earnout, define the metric precisely in the LOI, not just in the purchase agreement.
Too-short exclusivity — 30 days is rarely enough time to complete due diligence and financing. 60-90 days is standard for SBA-financed deals.
A buyer signs an LOI at $1.8M with "normal working capital at closing." The seller defines normal as the balance on the day of LOI signing. The buyer defines normal as the 12-month average. The gap is $140,000. This fight delays closing by six weeks and nearly kills the deal. Specifying the working capital target or methodology in the LOI prevents it entirely.
The Real Function of the LOI
The LOI forces both parties to confront the deal's major terms before either side has invested heavily in due diligence. It surfaces the first round of disagreements cheaply. A deal that falls apart at LOI is a success — it failed fast, before either side spent $50,000 on lawyers and accountants.
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