The Letter of Intent is the first document in a business acquisition that costs you real money. According to DealFlow OS, buyers typically spend $15,000 to $50,000 on legal and accounting fees during the exclusivity period the LOI creates. That clock starts the moment both parties sign. Getting the terms wrong at this stage does not just slow the deal. It can unwind it entirely.
An LOI is not a purchase agreement. It creates no obligation to close. Most of its terms are non-binding: the price, the structure, the diligence timeline, and the closing conditions can all change as you learn more about the business. Two provisions are almost always binding: exclusivity and confidentiality. Everything else is a framework, not a commitment. But the framework matters, because courts and negotiators treat the LOI as the map. Introducing new terrain later in the purchase agreement creates friction, damages trust, and sometimes kills the deal.
This is what a well-constructed acquisition LOI covers, why each section exists, and where buyers and sellers most often get it wrong.
Purchase price: the number must be anchored
The purchase price in an LOI is a negotiating anchor for everything that follows. Set it based on your adjusted EBITDA calculation and a comparable transaction multiple, not as a gut estimate and not as a deliberate lowball designed to leave room to move up later. Each of those tactics signals something to the seller: the first signals you have not done the work, the second signals you are not serious.
Price your offer at the low-to-mid end of your calculated range with a brief written rationale. A specific number with clear logic is more credible than a range, which tells the seller you are uncertain and invites them to hold out for the top.
The headline number gets most of the attention. The structure underneath determines whether the seller actually receives it. Per the BizBuySell 2026 Insight Report, the median sub-$5 million deal structure is 73% cash at close, 18% seller financing, and 9% earnout or rollover equity. A $2 million offer with 90% cash at close is not the same deal as a $2 million offer with 70% cash at close and 30% in a seller note. Sellers who have never sold a business before may not understand this distinction until the purchase agreement drafting stage, when the surprise creates a fight. Specify the breakdown in the LOI.
Deal structure: asset sale or entity sale
Most small and lower middle market acquisitions close as asset purchases, not stock or entity purchases. The buyer acquires specific assets and assumes specific liabilities, leaving unwanted liabilities with the selling entity. For sellers, this can create a larger tax bill. Asset sales are taxed less favorably than stock sales in many situations. For buyers, asset purchases provide cleaner liability protection.
Specify asset purchase or entity purchase in the LOI. Sellers who are not expecting an asset structure may object when they see the purchase agreement. Getting this structural question on the table at the LOI stage prevents a contentious late-stage negotiation after both parties have spent significant time and money on the deal. Related topics like earnout structures are explored in our piece on what operators get wrong on earnouts.
Exclusivity: the most valuable provision for the buyer
Exclusivity means the seller cannot market the business, negotiate with other buyers, or accept competing offers during the defined period. Without it, a buyer can spend six weeks and $30,000 on due diligence and lose the deal to a competing offer on day 43.
Standard exclusivity periods run 30 to 90 days. Buyers want longer because diligence takes time and SBA financing requires bank review. Sellers want shorter because they lose optionality. Push for 60 to 90 days, especially if the deal involves SBA 7(a) financing. The bank's underwriting process alone can take 30 to 45 days.
Exclusivity is binding. It is one of two LOI provisions that courts will enforce. If the seller violates it by engaging another buyer during the exclusivity window, you may have legal remedies: injunctive relief, expense reimbursement, and extension of the exclusivity period. Those remedies exist on paper. In practice, a seller who shops the deal during exclusivity is telling you something about how they will behave post-close. Take note.
Working capital: the trap that shows up at closing
Working capital is current assets minus current liabilities, excluding cash and debt. In most acquisitions, the buyer assumes the business has a normalized level of working capital available to fund ongoing operations. If the seller runs the business lean in the months before close, withdrawing cash and letting receivables collect without replenishing inventory, the buyer inherits a business that needs additional capital to operate from day one.
Set a working capital target in the LOI. The standard approach is the trailing-12-month average. State that purchase price adjusts if actual working capital at close is above or below target, with a true-up period of 60 to 90 days post-close. Include the dispute mechanism: a single accounting firm to break ties on calculation disagreements.
Not addressing working capital in the LOI does not mean the issue goes away. It means the fight happens in the purchase agreement, after both parties have invested significant time and money, when either party walking has real cost.
Escrow and holdback
Buyers typically hold back a portion of the purchase price in escrow to cover indemnification claims, working capital trueups, and undisclosed liabilities discovered post-close. For sub-$5 million transactions, the standard escrow is 5% to 10% of the purchase price, held for 12 to 18 months.
State the escrow amount in dollars, not percentages, in the LOI. State the release schedule: lump sum at month 12 or staged releases. Name the escrow agent: typically the closing attorney's trust account for smaller deals. And state the conditions under which the buyer may draw on the escrow. Leaving this section vague guarantees a contentious negotiation during purchase agreement drafting.
Due diligence period: scope and timeline
The due diligence period defines how long the buyer has to inspect the business before being committed to close or walk. State the length clearly (typically 45 to 90 days) and what the seller is obligated to produce: financial statements, tax returns, customer contracts, lease agreements, employee records, and a complete representation of known liabilities.
Include the buyer's right to visit the facility, interview key employees (with seller consent), and speak with major customers (also with seller consent). State explicitly that purchase price is subject to adjustment if adjusted EBITDA as verified by the buyer's accountant differs from the seller's represented figure by more than a specified threshold, typically 10%.
Vague language here invites disputes. A seller who discovers mid-diligence that the buyer plans to renegotiate price based on routine findings will fight back. Set clear adjustment triggers in the LOI, and both parties enter diligence with aligned expectations.
Conditions to closing
These are the events that must occur before the buyer is obligated to fund. Common conditions include:
- Financing commitment from lender
- Satisfactory completion of due diligence
- Third-party consents on key contracts and leases
- No material adverse change in the business between LOI signing and close
- Execution of definitive purchase agreement
- Employment or consulting agreement signed by seller if post-close transition is required
Listing these conditions in the LOI prevents them from appearing as surprises in the purchase agreement negotiation. A seller who does not expect the buyer to require third-party consent on the primary customer contract may object when they see it in the definitive agreement. Surface these requirements early.
Non-compete and non-solicitation
Most LOIs note that restrictive covenants will be included in the definitive agreements, with specific terms to follow. The standard non-compete for a lower middle market acquisition runs two to five years and covers the geographic market the business operates in. Non-solicitation of key employees and customers is separate and often has a longer term.
The LOI does not need to specify exact years and geography, but it should acknowledge that the definitive agreements will include customary restrictive covenants. Omitting any mention is not neutral. It signals to the seller that you have not thought through post-close competitive risk, or that you plan to introduce it as a surprise.
Binding vs. non-binding: read the carve-out
A well-drafted LOI includes a clear statement of which provisions are binding and which are not. The economic terms (price, structure, payment breakdown) are typically non-binding. The operational provisions (exclusivity, confidentiality, governing law, and break fees where applicable) are binding.
Read this section carefully before signing. A seller who breaches exclusivity cannot say the LOI was "just a letter." A buyer who wants to walk at closing cannot claim the LOI created no obligations. The carve-out determines what legal weight the document carries, and courts treat it as written.
The signal the LOI sends
A business owner who has built a company for 20 years evaluates every buyer interaction for evidence of who they are dealing with. An LOI that is vague on price structure, silent on working capital, and offers a 30-day exclusivity window signals a buyer who has not done the work or who is protecting optionality at the seller's expense.
An LOI that is specific, fair, and complete signals a buyer who understands how deals work and can be trusted to operate what they acquire. In lower middle market PE, where the operator-seller relationship often continues post-close, that signal matters more than the headline number.
Write the LOI like you intend to close it.
Disclosure: Patriot Growth Capital acquires and operates lower middle market businesses. This article is for educational purposes only and does not constitute investment advice or a solicitation to buy or sell securities. Past acquisition outcomes do not guarantee future results.
Frequently Asked Questions
Which LOI provisions are legally binding and which are not?
Two provisions are almost always binding: exclusivity and confidentiality. The economic terms, including price, structure, diligence timeline, and closing conditions, are typically non-binding but still serve as the negotiating map for everything that follows.
Why does purchase price structure matter as much as the headline number?
A 2 million dollar offer with 90% cash at close is a different deal than a 2 million dollar offer with 70% cash and 30% in a seller note. The median sub-5 million dollar deal structure is 73% cash at close, 18% seller financing, and 9% earnout or rollover equity, per the BizBuySell 2026 Insight Report, so sellers who do not understand this distinction face surprises at the purchase agreement stage.
What is the standard working capital approach in a business acquisition LOI?
The standard is to use the trailing-12-month average as a target. The purchase price adjusts if actual working capital at close falls above or below that target, with a true-up period of 60 to 90 days post-close. A clear dispute mechanism, typically a single accounting firm to break ties, should also be named in the LOI.
How long should an exclusivity period be and why does length matter for SBA deals?
Standard exclusivity periods run 30 to 90 days. Buyers should push for 60 to 90 days when the deal involves SBA 7(a) financing, because the bank's underwriting process alone can take 30 to 45 days. Exclusivity is one of the two LOI provisions courts will enforce.
