Most searchers think the deal dies in due diligence. It doesn't. It dies in the LOI.
The letter of intent is where price gets anchored, exclusivity gets set, and the seller decides whether you're serious. Get it wrong and you spend 90 days in diligence on a deal that was never yours. Get it right and you've removed your competition, set the terms of the conversation, and given yourself a runway to close.
Here's how the LOI actually works in a search fund acquisition, what operators get wrong, and what the Stanford data shows about how many tries it takes.
The LOI is not the offer. It's the operating agreement for the deal.
A letter of intent in a search fund acquisition is a non-binding summary of deal terms. It covers price, structure, financing contingency, exclusivity, and the timeline for due diligence and close.
The critical word is non-binding. According to the 2024 Stanford Search Fund Study, searchers sign an average of 3.6 LOIs before successfully closing an acquisition. That number tells you two things: most deals fall apart, and you need to be efficient about which LOIs you sign.
Roughly 90% of what goes into an LOI is legally unenforceable. The seller can walk away. You can walk away. The binding provisions are narrow: exclusivity, confidentiality, and expense allocation. Everything else is a handshake in writing.
That distinction matters. The LOI is not where you finalize price. It's where you signal intent, establish process, and lock out competing buyers.
What a search fund LOI covers
A well-structured LOI for a lower-middle-market search fund deal covers seven elements.
Purchase price. Usually stated as a total enterprise value. Sometimes expressed as a multiple of trailing twelve months EBITDA. Operators should specify whether this is on a cash-free, debt-free basis, and what happens to working capital at close.
Deal structure. Asset purchase or stock purchase. For SBA 7(a) financing, asset purchase is the default requirement from most lenders. The structure has tax implications for both parties that experienced sellers' attorneys will flag immediately.
Financing contingency. If you're using SBA financing, state it. Sellers deserve to know the deal depends on bank approval. A vague LOI that hides the financing contingency creates bad-faith problems at the finish line.
Exclusivity. The most important clause in the document. Standard duration runs 30 to 90 days. Deals with SBA financing typically require 60 to 90 days minimum because the bank's timeline is not negotiable.
Seller note and standby. SBA lenders commonly require sellers to carry a note with a standby period of 24 to 36 months. If the seller needs full liquidity at close, this is a deal-breaker. Surface it in the LOI.
Non-compete. Lenders and buyers both require it. Three to five years, covering the geographic and industry scope of the business. A vague non-compete opens litigation risk.
Working capital definition. Most operators skip this or leave it loose. It's the most common source of price disputes at close. Define working capital peg, the measurement date, and the post-close true-up mechanism before you sign.
The exclusivity clause: your only real protection
During the exclusivity period, the seller cannot market the business, accept competing offers, or engage with other buyers. You get clean air to do your work.
This is the only LOI clause that actually protects you. Everything else can be renegotiated or walked away from. Exclusivity cannot. A seller who violates it is in breach.
Calibrate the duration to the complexity of the deal and your financing source. An all-cash deal with a clean set of books might close in 60 days. An SBA deal with a business that has revenue concentration, deferred maintenance, or multi-entity structure needs 90 days minimum.
Do not accept 30 days on an SBA deal. The bank will not move that fast. You'll reach the end of exclusivity mid-diligence, ask for an extension, and negotiate from weakness. Build the right timeline into the original LOI.
What the Stanford data shows
The 2024 Stanford Search Fund Study reported that searchers submit their first LOI at approximately 7.8 months into the search. The average to close is 3.6 LOIs per successful acquisition.
That means you will sign LOIs on deals that fall apart. Expect it. The diligence process surface-fires new information. Sellers change their minds. Lenders push back on business quality. The working capital true-up blows up the economics.
The 60 to 90 day SBA timeline is well-documented across IBBA broker surveys and lender guidelines. The realistic outer bound is 120 days when there are title complications, real estate issues, or multi-party ownership.
Plan for 90. Hope for 60.
What sellers are actually reading for
Experienced business owners are evaluating two things when they read your LOI: certainty and respect.
Certainty means: does this buyer have the financing in place? Is the price realistic? Is the timeline achievable? Sellers have usually gone through a failed deal before. They remember what it felt like to pull the business off the market for three months and end up back at zero.
Respect means: did this buyer take the time to understand how the business works? A generic LOI with borrowed terms signals that the operator has not done the homework. A specific LOI that references the business's actual working capital cycle, the seller's earnout goals, or the real estate situation tells the seller you listened.
The LOI is also a signal about what the next 90 days will feel like. Sellers are about to hand over their books, their key employees, and their supplier relationships for examination. They want a buyer who treats the process like a partnership, not an interrogation.
Three mistakes operators make in LOI negotiation
Leaving working capital undefined. This is the number-one source of price disputes at close. Working capital varies by business and by day. Define the peg (usually trailing 12 months average), the measurement date (usually close), and the true-up window (usually 60 to 90 days post-close). A handshake understanding is not enough.
Using the LOI as a low-ball anchor. Submitting a price that's 30% below fair value to "see where the seller lands" wastes everyone's time and kills your credibility. The 2024 Stanford study's 3.6 LOI average is not an invitation to submit off-market offers. It reflects legitimate diligence failures, not negotiation theater. Know what you're paying before you sign.
Miscalibrating exclusivity. Too short and you can't close. Too long and the seller resists. The right duration is driven by your financing source and the deal's complexity. For SBA deals, 60 days is the floor. For complex deals with real estate or multi-entity structures, 90 days is necessary. State your reasoning in the LOI. Sellers who understand why you need the time are more likely to grant it.
The path from LOI to close
Once the LOI is signed, the clock starts. The typical sequence (for a full breakdown of search fund timing, see our search fund timeline guide):
- Quality of earnings (QoE) report. Your lender will require it. Budget three to four weeks. This is where revenue concentration, customer churn, and off-balance-sheet liabilities show up.
- Legal due diligence. Entity structure, contracts, IP ownership, litigation history. Hire a transactional attorney who has done search fund deals before.
- Definitive purchase agreement. The legally binding document. Takes two to four weeks of negotiation after QoE. Every word in the LOI becomes a starting point for negotiation here.
- SBA credit approval and closing. Add two to four weeks for the bank's underwriting and closing package.
The deals that close in 60 days are the ones where nothing surprising comes out of QoE, the seller's attorney is experienced, and the bank's underwriting is clean. Count on 90 for everything else.
What to do before you sign
Search the 2024 Stanford Search Fund Study for the current LOI-to-close benchmarks. Read the IBBA deal multiples report for your target industry. Know what you're paying before you submit.
Hire a transactional attorney before the LOI. Not after. The attorney's job at the LOI stage is to catch the clauses that become expensive problems in the purchase agreement. Working capital definitions, the SBA seller note standby, and the non-compete scope all deserve professional eyes before you put pen to paper.
Your first LOI probably won't close. The Stanford data says so. Use that reality to calibrate your expectations and sharpen your process. Every LOI teaches you something about diligence, pricing, and deal structure. The operators who close learn faster than the ones who study from the sidelines.
The letter of intent is where the deal starts. Show up with a clean document, a realistic price, and 90 days of exclusivity built in. That's the job.
Patriot Growth Capital focuses on lower-middle-market acquisitions through veteran-founded leadership. Our team has direct experience in the search fund acquisition process. This content is educational and does not constitute legal, financial, or investment advice.
