Is a letter of intent to purchase a business legally binding?

Mostly not, by design. Price, structure and payment terms are stated as intentions. Exclusivity, confidentiality, expenses and governing law are normally written as binding and take effect on signature. The letter should say which clauses fall into which category in its own words rather than leaving it to inference.

What is the difference between an LOI and an IOI?

An indication of interest comes earlier and is looser: a price range based on summary material, with no exclusivity. An LOI narrows that to a single number, a structure and a timetable, and usually stops the seller from running a parallel process.

How long should exclusivity last?

Thirty to ninety days is the common range in the lower middle market, driven by how much diligence the buyer needs and whether financing is involved. Sellers push for shorter with an extension available on progress. Buyers push for longer. Whatever is agreed, the value of the period depends on the seller having material ready on day one.

Can a buyer lower the price after the LOI?

Yes, and it happens. Because price is non binding, a buyer can revisit it after diligence. A reduction is defensible when it traces to a specific finding, such as addbacks that cannot be supported or a customer contract that does not transfer. A reduction with no finding behind it is a negotiating move, and the seller's answer depends on how much runway is left in the exclusivity period.

Who writes the letter of intent?

Usually the buyer, or the buyer's adviser. The seller and their adviser mark it up. Sellers who treat the first draft as a starting point rather than a form tend to settle working capital, earnout mechanics and exclusivity length on better terms, because those are cheapest to change before signature.

How does Dealinit help between LOI and closing?

The deal carries one state: open issues, the decision taken on each, the action it produced, and the document that supports it, all attached to the deal rather than scattered across threads. When a price question comes back to a diligence finding, the record of that finding is already there. Pro is $199 per month.

Guide

Letter of intent to purchase a business

The letter of intent is the point where a conversation becomes a transaction. It fixes a price, a structure and a timetable, and it usually stops the seller from talking to anyone else while the buyer completes diligence. Most of it does not bind either party. The parts that do bind are short, easy to skim past, and the ones that cost money when they are wrong. This guide covers what the letter sets out, which clauses take effect on signature, and what happens in the weeks after.

Advisors discussing transaction documents — What the letter sets out

What the letter sets out

Ten items cover most letters in the lower middle market. The question to ask of each is whether it could be read two ways by people who later disagree.

Price and how it is calculated

State the headline number and the basis behind it, usually a multiple of adjusted earnings. A price with no stated basis gets rebuilt during diligence, and the rebuild always runs downward.

Structure of the deal

Asset purchase or share purchase, and which entity is buying. The choice changes tax treatment, which contracts transfer, and which liabilities follow the business.

What is included and excluded

Cash, real property, vehicles, surplus equipment and personal items are the usual arguments. Name them here rather than in the purchase agreement.

Working capital

Say that a normal level will be agreed and how it will be measured. Left vague, it becomes a price negotiation two weeks before closing.

Payment terms

Cash at closing, seller note, earnout and escrow, with the period for each. An earnout needs the metric and who controls it written down now, not later.

Conditions to closing

Financing, landlord consent, key customer consents, regulatory approval, and the outcome of confirmatory diligence.

Exclusivity

The seller stops talking to other buyers for a set period, commonly 30 to 90 days. This clause is normally binding, so the length matters more than it looks.

Confidentiality and announcements

Usually binding, and usually an extension of the NDA already signed. Include who may be told and when staff are informed.

Expenses and break arrangements

Who pays their own advisers, and whether anything is owed if a party walks away.

Timetable and expiry

Target signing date and a date the letter lapses. An open ended LOI drifts, and drift favours the party with the least to lose.

Which parts are binding

Usually binding

Exclusivity, confidentiality, expense allocation, governing law and dispute resolution. These take effect on signature and are enforceable on their own terms.

Usually not binding

Price, structure, payment terms and conditions. They set out the deal both sides intend to do, and they move if diligence turns up something material.

Where it goes wrong

A letter that does not say which parts bind, or that mixes both kinds in one paragraph. Say it plainly in its own clause, and have a lawyer read it before signing. This page is general information, not legal advice.

What happens after signing

Signature and exclusivity starts
The clock begins. Everything after this point is measured against the timetable in the letter.
Diligence request list
The buyer's list arrives in bulk within days. Material prepared before the LOI is what keeps the schedule intact.
Confirmatory diligence
Financial, legal, commercial and technical questions run in parallel. Findings here are the only legitimate reason to move the price.
Purchase agreement drafting
The LOI becomes the term sheet lawyers work from. Anything left ambiguous in the letter is renegotiated in the draft.
Disclosure schedules
Written from the diligence record. A clean record shortens them and narrows the indemnities the seller carries.
Signing and closing
Conditions are satisfied, consents land, funds move. Most delays at this stage trace back to a consent nobody chased in week one.

For the request list a buyer works through in that period, see the due diligence checklist for selling a business, the M&A due diligence process, and for holding the deal state while it runs, the guides to M&A deal management software and M&A CRM software.

How Dealinit approaches it

Between the letter and closing, the useful record is not the documents sent, it is what is still open. Dealinit holds one deal state across sources: each open question sits on the deal as an issue, the decision taken is recorded with the action it produced, and the evidence stays attached to both. When a term from the letter is revisited, the finding behind it is already on the deal. Access is scoped per person and changes leave an audit trail; data is encrypted at rest and in transit. Pro is $199 per month.

Common questions

Is a letter of intent to purchase a business legally binding?: Mostly not, by design. Price, structure and payment terms are stated as intentions. Exclusivity, confidentiality, expenses and governing law are normally written as binding and take effect on signature. The letter should say which clauses fall into which category in its own words rather than leaving it to inference.
What is the difference between an LOI and an IOI?: An indication of interest comes earlier and is looser: a price range based on summary material, with no exclusivity. An LOI narrows that to a single number, a structure and a timetable, and usually stops the seller from running a parallel process.
How long should exclusivity last?: Thirty to ninety days is the common range in the lower middle market, driven by how much diligence the buyer needs and whether financing is involved. Sellers push for shorter with an extension available on progress. Buyers push for longer. Whatever is agreed, the value of the period depends on the seller having material ready on day one.
Can a buyer lower the price after the LOI?: Yes, and it happens. Because price is non binding, a buyer can revisit it after diligence. A reduction is defensible when it traces to a specific finding, such as addbacks that cannot be supported or a customer contract that does not transfer. A reduction with no finding behind it is a negotiating move, and the seller's answer depends on how much runway is left in the exclusivity period.
Who writes the letter of intent?: Usually the buyer, or the buyer's adviser. The seller and their adviser mark it up. Sellers who treat the first draft as a starting point rather than a form tend to settle working capital, earnout mechanics and exclusivity length on better terms, because those are cheapest to change before signature.
How does Dealinit help between LOI and closing?: The deal carries one state: open issues, the decision taken on each, the action it produced, and the document that supports it, all attached to the deal rather than scattered across threads. When a price question comes back to a diligence finding, the record of that finding is already there. Pro is $199 per month.