An LOI is not the final purchase agreement, but it frames the transaction the parties intend to negotiate. It can address price, transaction form, financing, diligence, closing conditions, and the parties’ conduct while they work toward definitive documents. Hoopes Adams & Scharber, “Letters of Intent in a Business Sale: 7 Seller FAQs,” April 12, 2023.
Why Price Alone Does Not Define an LOI
A headline price does not tell a seller how much is paid at closing, what remains contingent, what capital must remain in the business, what conditions the buyer must satisfy, or what obligations the seller accepts after closing. A seller can agree on a price while still facing material differences in payment structure, risk allocation, and control.
Brooks Pierce notes that sellers may lose bargaining leverage over other important terms once price is agreed and the business is subject to exclusivity. The practical lesson is not that every term must be fully drafted in an LOI. It is that the seller should identify the economic and process terms that matter before taking the business off the market. Brooks Pierce, “The Best of Intentions: Letters of Intent in the Sale of a Business”.
Deal Structure and Form of Consideration
Asset sale, stock sale, or another structure
The form of transaction can affect which assets, liabilities, contracts, approvals, and obligations are part of the deal. Sellers should understand whether the buyer proposes to acquire assets, ownership interests, or another structure, then ask qualified legal and tax advisers how that structure affects the seller’s specific circumstances.
The LOI should make clear which transaction form the parties are discussing rather than leaving a fundamental structural question for later. Sellers should have qualified legal and tax advisers review the proposed structure before accepting it.
Cash at closing and contingent consideration
Separate the amount payable at closing from amounts tied to financing, seller notes, rollover equity, earnouts, holdbacks, or other future conditions. Each form of consideration has different timing, risk, and information questions. A larger headline number is not necessarily the same as more certain proceeds.
Financing and buyer capability
If financing is part of the proposal, the LOI should make clear what the buyer expects to arrange, what conditions may apply, and how financing affects the path to closing. Sellers should avoid treating a financing reference as proof that funds will be available or that the transaction will close.
Working Capital and Purchase Price Adjustments
Working capital is a transaction term
A working-capital target is not a valuation conclusion. It is a negotiated expectation about the normalized net working capital the business will deliver at closing, measured under definitions set by the transaction documents. A shortfall or excess can affect final proceeds depending on those definitions and the agreement’s adjustment mechanics.
Definitions matter more than labels
Sellers should identify the accounts included and excluded, the accounting policies used, the historical period supporting any target, and the procedure for estimating and finalizing closing working capital. For the mechanics and document touchpoints, see working capital peg in a business sale.
Do not leave the true-up framework vague
If the buyer proposes a post-closing adjustment, ask how the closing estimate, final calculation, information access, objections, and dispute process will work. Brooks Pierce identifies post-closing purchase-price adjustments and related dispute questions as terms that merit attention in the LOI rather than surprise in later documents. Brooks Pierce.
Exclusivity, Diligence, and Timing
Exclusivity changes the negotiation dynamic
An exclusivity or no-shop provision generally restricts the seller from pursuing another buyer for a stated period while the parties negotiate and conduct diligence. It may be reasonable in a serious process, but it changes the seller’s options. The seller should understand its duration, scope, extension mechanics, and what progress the buyer is expected to make during that period.
Set a workable diligence scope
Diligence should be organized enough that the buyer can evaluate the business without unnecessary disruption. Identify the requested financial, operating, customer, employee, contract, and site-access information; who may receive it; and when more sensitive information will be released. Hoopes Adams & Scharber describes the LOI as a framework for due diligence, confidentiality, exclusivity, and a path toward definitive documents. Hoopes Adams & Scharber, April 12, 2023.
Timing should be specific enough to manage
A seller does not need a universal timetable. But the LOI should provide enough structure to understand key diligence, financing, document, approval, and closing milestones. The seller should know what happens if the process stalls, information requests expand, or a proposed closing condition is not met.
Closing Conditions and Deal Certainty
Conditions identify what still must happen
Closing conditions are the events or approvals the parties expect before closing. They may involve diligence, financing, third-party consents, required approvals, key personnel, or other transaction-specific matters. A condition is not merely a checklist item; it can affect whether and when the deal proceeds.
Separate confirmed facts from buyer assumptions
Sellers should ask which conditions are already supported by evidence, which remain subject to buyer judgment, and who bears the work or risk of satisfying them. A condition described broadly in an LOI can become a source of uncertainty if the parties do not share the same understanding of what completion requires.
Consider the connection between conditions and price
When a buyer asks for more conditions, more flexibility, or more time, the seller should consider the full package of price, certainty, exclusivity, and post-closing obligations. The terms should be evaluated together rather than as isolated requests.
Seller Obligations After Closing
Transition support
An LOI may anticipate a seller transition, consulting role, employment arrangement, training obligation, or customer handoff. Sellers should understand the expected role, authority, duration, compensation, and practical demands before treating a transition reference as routine.
Restrictive covenants
Noncompetition, nonsolicitation, confidentiality, and related restrictive covenants can limit what a seller may do after the sale. Brooks Pierce identifies the scope, duration, geography, restricted activities, and consideration allocated to restrictive covenants as matters that may require negotiation. Brooks Pierce.
Post-closing claims and retained exposure
Representations, warranties, indemnification, holdbacks, and other post-closing obligations can affect what the seller retains after closing. The LOI may not contain full legal drafting, but it can identify the parties’ intended approach and the issues that need resolution before definitive documents are signed.
Which LOI Terms May Be Binding
Do not assume the LOI is entirely nonbinding
An LOI can contain both nonbinding statements of intent and binding provisions. The document should clearly identify which terms fall into each category. Hoopes Adams & Scharber notes that exclusivity and confidentiality provisions may be binding even where the obligation to complete the sale is not. Hoopes Adams & Scharber, April 12, 2023.
Read the binding provisions as operating rules
Binding terms can govern the parties’ behavior before a purchase agreement is signed. These may include confidentiality, access to information, exclusivity, expenses, governing law, and provisions that describe how the parties will handle negotiations. Sellers should have qualified counsel explain the practical effect of each binding term.
What Sellers Should Resolve Before Signing
- What is the actual consideration at closing, and what remains contingent or deferred?
- What transaction structure is proposed, and what issues require legal or tax advice?
- How will working capital and other purchase-price adjustments be defined and resolved?
- How long does exclusivity last, what does it restrict, and what buyer progress is expected?
- What diligence access is permitted, and how will sensitive information be controlled?
- Which closing conditions remain, and who controls their satisfaction?
- What transition, restrictive-covenant, indemnification, or other post-closing obligations are contemplated?
- Which provisions are binding, and which remain subject to definitive documentation?
Sources and Scope
This article is based on Brooks Pierce, “The Best of Intentions: Letters of Intent in the Sale of a Business” and Hoopes Adams & Scharber, “Letters of Intent in a Business Sale: 7 Seller FAQs,” April 12, 2023. It provides general seller-side education, not legal, accounting, or tax advice. LOI and purchase-agreement terms should be reviewed with qualified advisers in light of the specific transaction.