Should You Sign an LOI
to Buy a Business?
The letter of intent is the most consequential document in a deal. It sets the terms, defines the timeline, and determines your leverage for everything that follows.
Definition: Letter of Intent (LOI)
A preliminary agreement between buyer and seller outlining the key terms of a proposed business acquisition. Typically includes purchase price, deal structure, exclusivity period, due diligence timeline, and closing conditions. Most provisions are non-binding, but certain clauses (exclusivity, confidentiality, expenses) often create enforceable obligations.
Before You Sign
What an LOI Actually Commits You To
Most buyers focus on the purchase price. The provisions below are what actually shape your deal.
Exclusivity period
You cannot look at other deals. The seller can continue operating and fielding interest, but you are locked in.
Earnest money or deposit at risk
Many LOIs require a good-faith deposit. If the deal falls apart for the wrong reasons, you may not get it back.
Confidentiality obligations that survive termination
Even if the deal dies, you are still bound by confidentiality. This limits what you can do with information learned during diligence.
Timeline pressure that affects your negotiating position
Once the clock starts, every day counts. Sellers know this. Tight timelines push buyers to accept terms they would otherwise negotiate.
Due diligence costs you will incur after signing
Legal, accounting, and advisory fees start accumulating immediately. If the deal falls through, those costs are yours.
Common Mistakes
5 Things Most Buyers Miss Before Signing
Binding vs. non-binding confusion
Buyers assume the whole LOI is non-binding. It is not. Exclusivity, confidentiality, and expense provisions are almost always binding. If you sign an LOI with a 120-day exclusivity period, you are legally committed to that timeline regardless of what happens with the rest of the deal.
Exclusivity period too long
Standard is 60 to 90 days. Some sellers push for 120 to 180. Every extra day is leverage you are giving away. During exclusivity, the seller can continue running the business however they want while you are prohibited from pursuing alternatives. Keep it tight.
No termination rights
If due diligence reveals problems, can you walk away cleanly? Many LOIs do not specify. Without explicit termination rights, you may face disputes over deposits, expense reimbursement, or breach claims. Your LOI should clearly state that you can terminate for any reason during the diligence period.
Vague due diligence access
"Reasonable access" means nothing in practice. Specify exactly what records you need, when you need them, and how they will be delivered. Include response timeframes. If the seller cannot produce three years of tax returns within five business days, that tells you something important about the business.
Missing working capital targets
If working capital is not defined in the LOI, you will fight about it at closing. Sellers have every incentive to drain cash, delay collections, and accelerate payables between the LOI and close. Set a working capital target in the LOI and tie purchase price adjustments to it.
When to Walk Away
- Seller will not agree to reasonable exclusivity terms
- No access to financials before signing
- Pressure to skip or shorten due diligence
- Material information changes between initial discussions and LOI
- Seller's attorney is more aggressive than the deal warrants
- Your gut says the seller is hiding something
When the LOI Makes Sense
- You have verified basic financials and the business is real
- The purchase price range is reasonable based on available data
- You have financing in place or a clear path to it
- You have identified your deal team (attorney, accountant, lender)
- The seller is motivated and cooperative
The LOI is where 80% of deal problems start. Not because the terms are wrong, but because buyers don't realize which terms are binding and which ones they can still negotiate. By the time they figure it out, they've already spent $50,000 on due diligence.
Get your LOI reviewed before you sign
Acquisition Stars reviews your letter of intent for hidden risks, unfavorable terms, and missing protections. 24-48 hour turnaround.
Request LOI ReviewCommon Questions
Frequently Asked Questions
Is an LOI legally binding?
Most LOI provisions are non-binding, but certain clauses typically create enforceable obligations. Exclusivity periods, confidentiality requirements, and expense allocation provisions are almost always binding. The rest of the LOI, including purchase price, deal structure, and closing conditions, is generally non-binding until a definitive purchase agreement is signed.
What should be included in an LOI to buy a business?
A well-drafted LOI should include: purchase price and deal structure (asset vs. stock purchase), payment terms and financing contingencies, exclusivity period with a defined end date, due diligence scope and timeline, working capital targets, key closing conditions, termination rights for both parties, and clear identification of which provisions are binding and which are not.
How long should an exclusivity period be in an LOI?
Standard exclusivity periods range from 60 to 90 days. This gives the buyer enough time to complete due diligence without giving the seller an unreasonably long commitment. Be cautious of sellers who push for 120 to 180 days. Every extra day of exclusivity is leverage you are giving away, and it prevents you from pursuing other opportunities.
Can I back out after signing an LOI?
In most cases, yes. Because the core commercial terms of an LOI are typically non-binding, you can walk away if due diligence reveals problems or the deal no longer makes sense. However, you will still be bound by the binding provisions (exclusivity, confidentiality, potentially expenses). If the LOI lacks clear termination rights, walking away may be more complicated and costly.
Do I need a lawyer to review my LOI before signing?
Yes. The LOI sets the framework for the entire transaction. Terms that seem minor at the LOI stage, such as exclusivity length, binding language, and working capital definitions, become major leverage points during purchase agreement negotiation. Having an M&A attorney review your LOI before signing is significantly less expensive than trying to fix unfavorable terms after you have already committed.
Related Resources
LOI Review for Business Acquisitions
Professional review of your letter of intent before you sign.
LOI Review vs. Full Due Diligence
Understanding the difference and when you need each.
LOI Red Flags: 7 Deal Killers
Hidden provisions that shift risk from seller to buyer.
Binding vs. Non-Binding LOI Provisions
What is enforceable and what you can still negotiate.
Best Practices for LOI Negotiation
How to negotiate better terms before committing.
Due Diligence Services
Comprehensive review of the business after the LOI is signed.
Don't sign until you know what you're committing to
An LOI review takes 24-48 hours. A bad deal takes years to recover from. Know your risks before you commit.
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