The Essential Components
A Letter of Intent should cover the key deal terms: purchase price and structure, what's included in the sale, financing and due diligence contingencies, exclusivity, transition and non-compete, timeline, and confidentiality. The goal is to capture the essentials both sides need to agree on before drafting the definitive agreement, specific enough to be meaningful, but not so detailed that it becomes the purchase agreement itself. Here's what belongs in it.
Whether you're buying or selling, get a broker's guidance on structuring an LOI that leads to a closed deal.
Price and Structure
- Purchase price and how it's determined
- Deal structure — asset sale vs. stock sale
- Payment terms — cash at closing, any seller financing, earnouts
- What's included — assets, inventory, and how working capital is handled (see purchase price adjustments)
Contingencies and Conditions
- Due diligence period — how long the buyer has to investigate
- Financing contingency — the deal is subject to the buyer securing financing
- Other conditions — lease assignment, license transfers, key approvals
These define what has to happen for the deal to proceed to closing.
Exclusivity and Confidentiality
The LOI should address exclusivity (a no-shop period during which the seller stops marketing the business while the buyer completes diligence) and confidentiality. These are typically among the binding provisions, and they protect the buyer's investment in due diligence and the seller's sensitive information.
Transition, Non-Compete, and Timeline
- Transition and training — the seller's post-closing involvement
- Non-compete — the general expectation the seller won't compete
- Timeline — target dates for diligence, the definitive agreement, and closing
- Purchase-price allocation — at least the intent, since it affects taxes for both sides
Clarify What's Binding
Critically, the LOI should state which provisions are binding and which are not, typically the deal terms are non-binding while exclusivity and confidentiality are binding. This clarity prevents disputes later. Keep the LOI focused on these essentials; the fine detail belongs in the definitive purchase agreement. Have an attorney review it before signing.
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 should be included in a Letter of Intent?
An LOI should cover the purchase price and structure (asset vs. stock sale), payment terms including any seller financing, what's included in the sale and how working capital is handled, the due diligence period, financing and other contingencies, exclusivity and confidentiality, transition and non-compete expectations, the timeline, and a clear statement of which provisions are binding.
How detailed should an LOI be?
Specific enough to be meaningful on the key terms, but not so detailed that it becomes the purchase agreement. The LOI captures the essentials both sides need to agree on, price, structure, contingencies, exclusivity, and timeline, while the fine legal detail is reserved for the definitive purchase agreement drafted later by attorneys.
Should an LOI include the due diligence period?
Yes. The LOI should specify how long the buyer has to conduct due diligence, along with the financing contingency and other conditions like lease assignment or license transfers. These define what has to happen for the deal to proceed from the LOI to closing.
Does an LOI need to say what's binding?
Yes, it should clearly state which provisions are binding and which are not, typically the deal terms (price, structure) are non-binding, while exclusivity and confidentiality are binding. This clarity prevents disputes later about whether either party was legally committed, which is why attorney review is important.
Making Sure Your LOI Covers the Bases?
Martin Navarro helps structure LOIs that capture the right terms and lead to closing. Let's talk, confidentially and with no obligation.
Request a Confidential Consultation Call or text: 818-633-3254 · 365navarro.martin@gmail.com