The Letter of Intent is the bridge between finding a business and closing the deal. Here's what you need to know:
Key LOI components: 1. Purchase price — Total price and how it's determined (fixed vs. earn-out) 2. Deal structure — Asset purchase vs. stock purchase (asset is standard for small businesses) 3. Payment terms — Cash at closing, SBA financing, seller note, earn-out 4. Due diligence period — Typically 60–90 days of exclusivity 5. Working capital provisions — How much working capital stays in the business 6. Non-compete — Seller's commitment not to compete (typically 3–5 years, 50-mile radius) 7. Transition period — Seller's commitment to train the buyer (30–90 days typical) 8. Key conditions — Financing contingency, lease assignment, employee retention 9. Confidentiality — Ongoing NDA provisions 10. Exclusivity (no-shop) — Seller can't negotiate with other buyers during DD period
Binding vs. non-binding provisions: Most LOI terms are non-binding — they're a handshake agreement on deal terms. However, certain provisions are typically binding: - Confidentiality/NDA - Exclusivity/no-shop period - Expense allocation (who pays for what during DD) - Governing law
LOI negotiation tips: - Start with your ideal terms, but be reasonable — this is a relationship - Always include a financing contingency if using SBA or bank financing - Request 90 days of exclusivity (seller may counter at 60) - Be specific about what "working capital" means and how it's measured - Include a transition period requirement (critical for knowledge transfer) - Have your M&A attorney draft or review before signing
After the LOI: Once both parties sign, the buyer enters the due diligence phase. During this exclusivity period, the buyer has sole access to investigate the business. If DD reveals material issues, the buyer can renegotiate terms or walk away (since the LOI is non-binding on price and terms).