The LOI, Defined
A Letter of Intent (LOI) is a document that outlines the proposed terms of a business sale, price, structure, key conditions, exclusivity, and timeline, before the parties draft the binding purchase agreement. It's the framework the rest of the deal is built on. An LOI is mostly non-binding on the core terms (they're statements of intent), but usually includes a few binding provisions like exclusivity and confidentiality. It typically comes after an offer is accepted and before due diligence begins.
Whether you're buying or selling, get a broker's guidance on structuring an LOI that leads to a closed deal.
What an LOI Is For
The LOI's purpose is to align both parties on the key terms before anyone spends significant time and money on due diligence, legal drafting, and financing. Rather than diving into an expensive definitive agreement cold, the buyer and seller first agree on the essentials, is the price right, is the structure acceptable, what are the conditions? If they can't agree at the LOI stage, they've saved themselves the cost of a failed deal. If they can, they have a roadmap.
Where the LOI Fits in the Deal
In a typical transaction, the sequence is: the buyer makes an offer, the parties negotiate and sign an LOI, the buyer conducts due diligence during an exclusivity period, financing proceeds, attorneys draft the definitive purchase agreement, and the deal closes through escrow. The LOI sits right at the pivot, after initial agreement, before the heavy lifting. See what happens after you accept an offer.
Mostly Non-Binding, With Exceptions
A common point of confusion: an LOI is largely non-binding on the deal itself, the price and terms are intentions, not commitments, so either party can generally walk away (subject to good faith). But specific provisions are usually binding: exclusivity, confidentiality, and sometimes expense-sharing. Understanding which parts bind you is essential, and a reason to have an attorney review it.
Who Drafts the LOI
The buyer typically drafts the LOI, presenting their proposed terms, and the seller negotiates from there. In a broker-managed sale, the broker helps structure and negotiate it, and both sides' attorneys review it. Because the LOI shapes everything that follows, getting the terms right, and understanding what you're signing, matters enormously. See what should be included and how to write one.
Note: This article is general educational information, not legal advice. An LOI and purchase agreement are legal documents — have a qualified attorney review yours.
Frequently Asked Questions
What is a Letter of Intent (LOI)?
A Letter of Intent is a document that outlines the proposed terms of a business sale, price, structure, key conditions, exclusivity, and timeline, before the binding purchase agreement is drafted. It's mostly non-binding on the core terms but usually includes binding provisions like exclusivity and confidentiality, and it typically comes after an offer is accepted and before due diligence.
Is a Letter of Intent binding?
Mostly not. An LOI is largely non-binding on the deal's core terms, price and structure are statements of intent, so either party can generally walk away in good faith. However, specific provisions like exclusivity, confidentiality, and sometimes expense-sharing are usually binding. It's important to understand which parts bind you, and to have an attorney review it.
What is the purpose of an LOI in a business sale?
To align both parties on the key terms before spending significant time and money on due diligence, legal drafting, and financing. If buyer and seller can't agree at the LOI stage, they avoid the cost of a failed deal; if they can, they have a roadmap for the definitive agreement and closing.
When is a Letter of Intent signed?
Typically after the buyer's offer is accepted and before due diligence begins. The sequence is usually: offer, negotiate and sign the LOI, conduct due diligence during an exclusivity period, secure financing, draft the definitive purchase agreement, and close through escrow. The LOI sits at the pivot between initial agreement and the detailed work.
Reviewing or Drafting an LOI?
Martin Navarro helps buyers and sellers structure LOIs that lead to closed deals. Let's talk, confidentially and with no obligation.
Request a Confidential Consultation Call or text: 818-633-3254 · 365navarro.martin@gmail.com