Letter of Intent to Buy a Business: What to Include

A letter of intent (LOI) to buy a business sets out the main terms of the deal: price, structure, working capital, exclusivity, the due diligence period, contingencies, financing, the seller’s transition and a non-compete. It is usually non-binding on the transaction itself, while exclusivity and confidentiality clauses are binding. A precise LOI prevents most of the disputes that would otherwise appear when the purchase agreement is drafted.

The LOI is the point where negotiating leverage shifts. Before signing, the seller can talk to any buyer; after signing, the seller is typically locked into exclusivity with you. Terms left vague at this stage are usually settled later in the seller’s favor.

What is a letter of intent and why does it matter?

An LOI is a short document, often three to six pages, that records the agreed commercial terms before the parties spend money on due diligence and legal drafting. It gives the seller confidence that you are serious and gives you exclusive time to verify the business.

It also anchors the purchase agreement. Attorneys draft from the LOI, so anything missing from it becomes a fresh negotiation, often after you have already spent on accountants and lawyers. We prepare the LOI as part of our acquisition process once the valuation supports the price.

What clauses should an LOI include?

How should price and structure be written?

State the headline price and its components. If part of the price is a seller note, specify the amount, term, interest rate and security. If there is an earnout, define the metric and the measurement period precisely. A holdback or escrow for indemnity claims is easier to agree now than later.

Name the structure: asset purchase or stock (equity) purchase. The choice affects liabilities, taxes and consents, as explained in our guide to asset vs stock purchase. If the structure is still open, say who decides and by when.

What is a working capital peg?

Working capital is the money tied up in daily operations: inventory and receivables minus payables and accrued expenses. Without a target, a seller can collect receivables, run down inventory and delay paying vendors before closing, and you inherit a business that needs cash immediately.

A working capital peg sets the normal level the business should deliver at closing, often based on a trailing average. If actual working capital is below the peg, the price is reduced; if above, it may increase. Many small asset deals simply exclude cash and receivables and transfer inventory at a counted value, which serves the same purpose. Either way, address it in the LOI.

How long should exclusivity and due diligence run?

Exclusivity periods of 60 to 90 days are common. Due diligence typically takes 30 to 60 days, and closing often follows 60 to 120 days after the LOI. Set exclusivity to cover due diligence plus drafting time, and consider an automatic extension if the seller is late with documents.

Spell out what the seller must provide: three years of tax returns and financial statements, bank statements, payroll records, the lease, key contracts and licenses. Our due diligence begins with the bank statements, because they are the hardest data to adjust.

What contingencies protect the buyer?

Contingencies are conditions that must be met before you are obliged to close. The usual list:

• Satisfactory due diligence, at the buyer’s reasonable discretion.
• Financing, if any part of the price depends on a loan.
• Lease assignment or a new lease on acceptable terms.
• Transfer or reissue of licenses and permits.
• No material adverse change between signing and closing.
• Visa-contingent escrow, for E-2 buyers.

A visa-contingent escrow works like this: after the purchase agreement is signed, the investor’s funds are placed with an independent escrow agent. They are released to the seller only when the E-2 visa is issued, and returned (less any agreed costs) if it is refused. The State Department’s Foreign Affairs Manual (9 FAM 402.9) accepts funds in escrow released only on visa issuance as irrevocably committed. Sellers do not always accept this condition, because it ties up the sale for the duration of consular processing, so raise it in the LOI, not after. For businesses already screened for this, see businesses that fit E-⁠2 requirements, and for the visa itself, our sister site on the E-⁠2 visa process.

How should transition and non-⁠compete terms read?

A small business often depends on its owner’s relationships and know-how. Specify the transition period (for example, several weeks of full-time training followed by phone availability), whether it is paid, and what it covers.

The non-compete should name the duration, geographic area and activities, and include non-solicitation of customers and employees. Enforceability varies by state, so your attorney should confirm the wording. In an asset purchase, part of the price allocated to the non-compete has tax consequences on both sides.

Which parts of an LOI are binding?

Most LOIs state that only certain sections are binding: exclusivity, confidentiality, allocation of costs, governing law and termination. Everything else expresses intent and becomes binding only in the definitive purchase agreement.

Make the line explicit. Ambiguous drafting can lead a court to find that a binding agreement was formed, or that it was not when one party expected it to be. Your attorney should review the binding clauses before you sign.

What mistakes do buyers make in an LOI?

The same problems recur. Buyers offer a price before seeing bank statements, then find it hard to renegotiate after due diligence without appearing to retrade the deal. Others leave working capital undefined, accept a short exclusivity period that expires before due diligence is complete, or describe contingencies so loosely that the seller can argue they were never conditions at all.

Foreign buyers face a few more. They sign an LOI before confirming how funds will move from abroad, which can delay closing, or agree to an all-cash closing date that does not fit the visa timeline. Some accept seller financing secured by the business without realizing it may not count toward the E-2 investment. Each of these is easier to fix in the LOI than in the purchase agreement.

A useful test before signing: could your attorney draft the purchase agreement from this LOI without asking the seller a single new commercial question? If not, the LOI is not finished.

Next step

TealBridge drafts and negotiates the commercial terms of the LOI on the buyer side: price backed by our valuation, structure, working capital, exclusivity, due diligence scope and, for E-2 investors, visa-contingent terms. Your attorney then reviews the legal wording. Contact us before you sign an LOI on a business you are considering.