How to Write a Letter of Intent
to Purchase a Business
A step-by-step guide with real examples for asset acquisitions and stock acquisitions. Written from 15+ years of M&A transaction experience.
Nationwide M&A practice. Senior counsel on every transaction.
Letter of Intent (LOI) for Business Purchase: Plain-Language Definition
A letter of intent to purchase a business is a 3-8 page preliminary document that records the key economic and structural terms two parties have agreed to in principle. It is not a purchase agreement. Most provisions are expressly non-binding, meaning either party can walk away without legal liability. Binding carve-outs, typically exclusivity, confidentiality, and expense allocation, are enforceable. The LOI establishes the framework for the definitive purchase agreement and authorizes the buyer to conduct due diligence.
Part 1
What Is a Letter of Intent in an M&A Transaction?
Purpose, scope, and how it fits into the acquisition sequence.
In a business acquisition, the LOI is the first formal document that records both parties' intent to transact. It comes after preliminary conversations but before full due diligence, legal documentation, or closing. Think of it as a handshake agreement put in writing.
The LOI serves three specific functions:
Confirms both parties agree on the deal economics before either invests in due diligence, legal fees, or management time.
Grants the buyer access to the seller's books, contracts, employees, and operations for the due diligence period.
Prevents the seller from shopping the deal to other buyers while the buyer completes diligence and arranges financing.
The LOI is distinct from two other documents that buyers sometimes confuse with it. An LOI versus a term sheet are functionally similar but differ in formality. A term sheet is more common in venture capital and private equity deals; an LOI is more common in SMB acquisitions. The purchase agreement, by contrast, is the fully binding, definitive document executed at closing. The LOI is a precursor to that document, not a substitute for it.
The LOI does not obligate you to close. It obligates you to negotiate in good faith, give the other side access during the agreed due diligence period, and respect the confidentiality of what you learn. The economic terms, structure, and closing conditions remain open until the purchase agreement is signed.
Part 2
When to Use an LOI (and When Not To)
Use an LOI when:
- + The transaction involves meaningful due diligence (financial, legal, operational) that requires seller cooperation.
- + You need exclusivity to complete diligence without the seller running a competing process.
- + Purchase price or structure requires negotiation before committing to legal documentation costs.
- + Financing contingencies or third-party approvals need time to resolve before binding commitment.
- + The deal is complex enough that both sides benefit from documenting the agreed framework before drafting definitive agreements.
Skip the LOI when:
- - The transaction is simple enough that the parties can move directly to a purchase agreement without preliminary alignment.
- - Both parties have already conducted informal diligence and are ready to commit to binding terms.
- - Time pressure makes the LOI stage impractical and both sides understand the risks of moving faster.
- - The transaction involves real estate only, in which case jurisdiction-specific offer documents are standard instead.
Part 3
Step-by-Step: How to Write an LOI for a Business Purchase
The seven core provisions every LOI must address.
Parties and Transaction Structure
The LOI must identify the legal entities on both sides. "John Smith" is not sufficient if the buyer intends to take title through an acquisition vehicle. Specify: buyer entity name and type, seller entity name and type, and any parent or guarantor entities. Also specify whether the buyer reserves the right to assign the LOI to a newly formed acquisition entity.
The most consequential election in this section is asset acquisition versus stock acquisition. This determines:
| Factor | Asset Purchase | Stock Purchase |
|---|---|---|
| Liabilities inherited | Only those explicitly assumed | All liabilities, known and unknown |
| Tax treatment (buyer) | Step-up in basis on all assets | Carryover basis in stock |
| Tax treatment (seller) | Ordinary income on certain assets | Capital gains on stock sale |
| Contract assignment | Requires consent of counterparties | Contracts stay with the entity |
| Common in SMB deals | Yes, most frequent | Less common; varies by entity type |
The asset vs. stock election drives negotiation on price, reps and warranties, indemnification, and due diligence scope. It must be resolved at the LOI stage, not deferred to the purchase agreement.
Purchase Price and Payment Terms
The LOI should state the total enterprise value and how consideration is structured. A purchase price of "$3,500,000" is incomplete without specifying:
- How much is paid at closing in cash
- Whether a seller note is included, and if so, principal, interest rate, and term
- Whether earnout provisions apply, and if so, the formula, measurement period, and payment schedule
- Whether the price is subject to working capital adjustment (most deals above $1M include this)
- What the working capital target is, and how it is calculated
Working Capital: Define It Precisely in the LOI
Leaving working capital undefined in the LOI creates expensive disputes at closing. The LOI should specify: which current assets are included (receivables, inventory, prepaid expenses), which are excluded (cash, intercompany receivables), which current liabilities are included, and what the target amount is. A vague working capital provision routinely produces six-figure disagreements in the final days before closing.
Due Diligence Period and Conditions
The due diligence period is the window during which the buyer investigates the business before committing to close. Specify the number of calendar days (typically 30-60 for SMB transactions), the start date (usually LOI execution or deposit receipt), and what access the seller must provide: financial records, customer contracts, employee information, intellectual property, regulatory filings, and any material litigation.
Include a condition that the LOI is subject to satisfactory completion of due diligence. This is almost always non-binding but creates a documented process expectation. If you find something material during diligence, this clause supports your ability to renegotiate or exit without the seller claiming bad faith.
Exclusivity Provisions
Exclusivity is the LOI's most consequential binding provision. During the exclusivity period, the seller agrees not to solicit, negotiate with, or provide information to any other potential buyer. This is enforceable.
Specify: the exclusivity period (in calendar days, not "until due diligence is complete"), what the seller is prohibited from doing (soliciting bids, sharing information, continuing existing buyer discussions), and what triggers termination of the exclusivity obligation (if the buyer does not fund a deposit, if due diligence access is denied, or if the buyer materially changes price or structure).
Buyer vs. Seller Perspective on Exclusivity
Buyers want the longest exclusivity period possible. 60-90 days is typical. Automatic extension provisions give buyers additional runway.
Sellers should negotiate for: a hard deadline with no automatic extension, the right to void exclusivity if the buyer attempts to renegotiate price after due diligence begins, and a clear list of what constitutes a "bid solicitation" so the seller can continue general business operations without triggering a breach.
Binding vs. Non-Binding Sections
The LOI must clearly label which provisions are binding and which are not. The standard formulation is a preamble stating that the document is non-binding except for specifically enumerated sections, followed by explicit carve-outs.
For a deeper treatment of this topic, see the guide on binding vs. non-binding LOI provisions. The operative question for each provision: if the deal dies, does this obligation survive?
Typically Binding
- Exclusivity / no-shop
- Confidentiality obligations
- Expense allocation
- Governing law and jurisdiction
- Break-up fees (if included)
Typically Non-Binding
- Purchase price and payment terms
- Transaction structure
- Representations and warranties
- Indemnification provisions
- Closing conditions
- Employee and benefits matters
Confidentiality
If the parties have not already executed a standalone NDA, the LOI should include a confidentiality provision that covers: the scope of confidential information (what is protected), permitted disclosures (legal counsel, lenders, accountants on a need-to-know basis), the obligation to return or destroy information if the deal terminates, and the period of confidentiality (typically two years post-termination).
If a separate NDA is already in place, the LOI should cross-reference it rather than restating the obligations. Conflicting confidentiality provisions between an NDA and an LOI create ambiguity that no party benefits from.
Termination Conditions
The LOI should specify under what circumstances either party can terminate without liability under the binding provisions. Standard termination triggers include: expiration of the due diligence period without a satisfactory outcome, failure to reach agreement on definitive purchase agreement terms within a specified period, material adverse change in the business during the LOI period, and mutual written agreement.
Termination conditions matter because they define the outer boundaries of your commitment. Without a clear termination provision, parties can dispute whether the LOI remains in effect and whether the exclusivity or confidentiality obligations continue to apply.
Part 4
Sample LOI Language Examples
Annotated provisions for asset acquisitions and stock acquisitions.
Example A: Asset Acquisition LOI Language
The following provisions are representative examples. They are not a substitute for attorney-reviewed documentation tailored to your specific transaction.
1. Transaction Structure. Buyer intends to acquire substantially all of the assets and assume specified liabilities of Seller (the "Business") through an asset purchase transaction (the "Transaction"). The specific assets to be acquired and liabilities to be assumed shall be set forth in a definitive Asset Purchase Agreement (the "Agreement").
2. Purchase Price. The aggregate purchase price for the Business shall be [AMOUNT] (the "Purchase Price"), subject to adjustment as set forth below. The Purchase Price shall be payable as follows: (a) [AMOUNT] in cash at Closing; (b) [AMOUNT] pursuant to a seller promissory note bearing interest at [RATE]% per annum, with principal and interest payable over [TERM]; and (c) up to [AMOUNT] in earnout payments based on [METRIC] for the [PERIOD] following Closing.
3. Working Capital Adjustment. The Purchase Price shall be subject to a post-closing working capital adjustment. For purposes of this Letter, "Working Capital" means current assets (excluding cash and cash equivalents) minus current liabilities (excluding all indebtedness), calculated in accordance with GAAP applied consistently with the Financial Statements. The Working Capital Target is [AMOUNT]. Any deficiency shall reduce the Purchase Price; any surplus shall increase it, subject to a collar of [AMOUNT].
Annotated: Note the explicit working capital definition, the collar provision, and the separation of cash at closing from deferred consideration. Each element should be negotiated before execution.
Example B: Stock Acquisition LOI Language
1. Transaction Structure. Buyer intends to acquire 100% of the issued and outstanding shares of capital stock of Seller (the "Shares") from the existing shareholders (the "Shareholders") through a stock purchase transaction. No business assets or liabilities are excluded from the Transaction except as may be mutually agreed and set forth in the Agreement.
2. Purchase Price. The aggregate purchase price for the Shares shall be [AMOUNT] (the "Purchase Price"), calculated on a cash-free, debt-free basis with normalized working capital. At Closing, Buyer shall pay [AMOUNT] to Shareholders by wire transfer of immediately available funds. The Purchase Price shall be subject to: (a) a working capital adjustment as described herein; (b) a [AMOUNT] escrow holdback for a period of [MONTHS] to secure indemnification obligations; and (c) satisfaction of all indebtedness of the Company from the Purchase Price proceeds at Closing.
3. Representations and Indemnification. The Agreement shall contain customary representations and warranties of Seller and Shareholders regarding the Business, which shall survive Closing for [PERIOD]. Seller and Shareholders shall indemnify Buyer for breaches of representations, subject to a deductible of [AMOUNT] and a cap of [AMOUNT] of the Purchase Price, with specific fundamental representations surviving indefinitely and without cap.
Annotated: Stock acquisitions require explicit indemnification baskets, caps, and survival periods in the LOI because the buyer assumes all liabilities of the entity. These terms drive significant negotiation before the purchase agreement is drafted.
Use a Complete, Attorney-Reviewed Template
The examples above illustrate specific provisions. For a complete letter of intent template covering all sections, see the LOI template guide. For a side-by-side comparison of asset versus stock acquisition provisions, see the asset vs. stock purchase LOI guide.
Generate a Custom LOIPart 5
Common LOI Mistakes That Derail Deals
The errors that experienced counsel sees repeatedly across SMB transactions.
Leaving purchase price mechanics undefined
Stating a price without specifying cash-free/debt-free treatment, working capital target, or earnout formula creates a fundamentally ambiguous LOI. Both parties believe they agreed to the same number. They did not. The dispute surfaces in the final week before closing, when leverage has shifted entirely to the side that threatens to walk.
Agreeing to automatic exclusivity extensions
Some LOI forms include language that automatically extends the exclusivity period if the parties are "continuing to negotiate in good faith." This provision eliminates the seller's leverage entirely. There is no deadline. The buyer can stretch due diligence indefinitely, accumulate findings, and use them to renegotiate price with a seller who has no competitive alternative. Sellers must negotiate hard deadline exclusivity with manual extension only by mutual written consent.
Failing to specify the asset vs. stock election
An LOI that says "Buyer will acquire the Business" without specifying whether this is an asset purchase or stock purchase is incomplete. The two structures have different tax consequences, different due diligence requirements, different representations and warranties, and different indemnification profiles. Deferring this election to the purchase agreement negotiation wastes time and creates friction when both sides assumed they had agreed on structure.
Using a template without customizing material terms
Generic LOI templates omit deal-specific provisions that matter. An LOI for a professional services firm without non-solicitation provisions is materially incomplete. An LOI for a business with equipment financing without a specification of which liabilities transfer is a problem. Templates accelerate drafting but require attorney review to apply correctly to your transaction's specific facts.
No deadline for executing the definitive agreement
The LOI should specify a target date for executing the purchase agreement. Without this deadline, both parties can drag the process indefinitely, accumulating costs and allowing market conditions or business performance to change. A defined outside date (often 60-90 days from LOI execution) creates urgency and protects both sides from open-ended engagement.
Signing without legal review on either side
The binding provisions of an LOI, particularly exclusivity and confidentiality, are enforceable contracts. Parties who execute LOIs without counsel routinely discover that the obligations they accepted are not what they understood them to be. The investment in attorney review before signing is a small fraction of the cost of a dispute over an LOI term that was poorly drafted or poorly understood.
Have an LOI in Front of You Right Now?
If you are reviewing an LOI before signing, or preparing to send one, the issues described above are exactly what experienced M&A counsel reviews before execution. Alex Lubyansky works directly on every transaction. No associates, no hand-offs.
Part 6
When to Engage an M&A Attorney for Your LOI
The LOI stage is the right time to engage M&A counsel, not after it is signed. Here is why: the LOI establishes the framework that the purchase agreement will be negotiated around. If the LOI contains ambiguous terms, unbalanced exclusivity, or missing provisions, those problems compound through every subsequent negotiation stage.
Specifically, engage counsel when:
For Buyers
- You want to send an LOI that protects your due diligence investment
- The transaction involves an earnout or seller note that requires precise documentation
- You are acquiring a business with regulatory requirements (licenses, permits, contracts)
- The seller has sent their own LOI form and you want it reviewed before signing
- Deal size is large enough that structure matters to tax outcome
For Sellers
- The buyer has sent an LOI with a 90-day exclusivity period
- The LOI contains automatic extension language
- Price adjustment mechanisms are vague or undefined
- The indemnification provisions are open-ended in scope or duration
- You have multiple interested buyers and need to manage the process professionally
Acquisition Stars is a transaction-focused M&A law firm based in Novi, Michigan with a nationwide practice. Alex Lubyansky has 15+ years of M&A transaction experience and works directly on every engagement. The firm engages selectively with buyers and sellers who have real transactions, defined timelines, and committed capital.
For context on the full acquisition process, see the M&A services overview. For a comparison of the LOI to what comes after it, see the guide on LOI vs. term sheet.
Part 7
Frequently Asked Questions
What is a letter of intent to purchase a business?
A letter of intent (LOI) to purchase a business is a preliminary, largely non-binding document that sets out the key terms both parties have agreed to in principle: purchase price, transaction structure (asset purchase vs. stock purchase), due diligence period, exclusivity, and closing conditions. It is not a purchase agreement. It is the framework that allows both sides to commit resources to a deal before paying for full legal documentation. Most LOI provisions are non-binding, but exclusivity and confidentiality are typically enforceable.
Does a letter of intent need to be drafted by an attorney?
It is strongly advisable. While buyers frequently draft their own LOIs using templates, an attorney-reviewed LOI protects you in two specific ways: (1) it ensures the binding provisions, particularly exclusivity, are precisely scoped so you are not locked out of other opportunities indefinitely, and (2) it prevents deal-fatal ambiguities in purchase price mechanics, working capital definitions, and due diligence scope that create costly disputes before closing.
What is the difference between a binding and non-binding LOI?
A standard LOI contains both binding and non-binding sections. Non-binding provisions include purchase price, payment structure, representations, and closing conditions. These are frameworks for negotiation, not final commitments. Binding provisions include exclusivity (the seller cannot shop your offer to other buyers), confidentiality (protecting information exchanged during diligence), and expense allocation. Both parties can walk away from the deal without breaching the non-binding portions, but they remain liable under the binding terms.
What should be included in an LOI for a business purchase?
A complete LOI for a business purchase should include: (1) identification of parties and legal entities, (2) transaction structure (asset purchase or stock purchase), (3) purchase price and payment terms including any earnout or seller financing, (4) due diligence period and access conditions, (5) exclusivity period and scope, (6) confidentiality obligations, (7) conditions to closing, (8) termination provisions, and (9) governing law. The asset or stock election is particularly important because it determines tax treatment for both parties and drives the structure of the definitive agreement.
How long is a typical letter of intent for a business acquisition?
Most business acquisition LOIs run three to eight pages. Smaller transactions (under $5M) often use shorter, more straightforward LOIs of two to four pages. Larger or more complex transactions may use longer LOIs that more closely approach a term sheet format and address additional issues like employee matters, real estate, and regulatory approvals. Length is not a quality indicator. Precision is.
How long should the exclusivity period in an LOI last?
Exclusivity periods in business acquisition LOIs typically run 30 to 90 days. Buyers prefer longer periods to complete due diligence and arrange financing without competition. Sellers should resist exclusivity longer than 45 to 60 days unless the buyer can demonstrate a specific reason. Any extension beyond the initial period should require seller consent. Automatic extension provisions that do not require the seller's agreement weaken the seller's position materially.
What is the difference between an asset acquisition LOI and a stock acquisition LOI?
In an asset acquisition LOI, the buyer acquires specific assets and assumes only the liabilities explicitly listed. This structure gives buyers greater control over what obligations they inherit and is common in SMB transactions. In a stock acquisition LOI, the buyer acquires the seller's ownership interest in the entity itself, including all assets and liabilities whether disclosed or not. Stock purchases are more common with C-corporations and when the business has contracts or licenses that cannot be easily assigned. The LOI must clearly specify which structure governs, as this election affects price, tax treatment, and the entire due diligence scope.
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