Letter of intent to buy a business: what it is and what to include

What a letter of intent to buy a business is

A letter of intent to buy a business, often shortened to LOI, is a short document in which a prospective buyer sets out the key terms on which it is willing to acquire a company before either side commits to the cost and detail of a definitive purchase agreement. It confirms that buyer and seller share a common view of price, structure, and timing, and it frames the due diligence and drafting that follow. In practice the same document is sometimes called a term sheet, a memorandum of understanding, or heads of terms, but the function is the same: to align the parties on the shape of the deal before lawyers and accountants spend heavily on a definitive agreement.

The defining feature of a letter of intent is its mixed legal character. Under US law most of the substantive deal terms, above all the purchase price, are framed as non-binding statements of intent, so neither party can be forced to close on those terms alone. A smaller set of provisions, typically exclusivity, confidentiality, expense allocation, and governing law, is drafted to bind from signature. Courts look at both the wording of the letter and the conduct of the parties to decide what actually binds, and a poorly drafted LOI can accidentally create a binding contract to sell the business, so stating the binding and non-binding line explicitly is the single most important choice in the document.

An LOI to buy a business also reflects the two basic ways to structure the acquisition. In an asset purchase the buyer acquires selected assets and assumes only specified liabilities, while in a stock or equity purchase the buyer acquires the ownership interests and takes the company with its liabilities attached. The choice drives the tax outcome, the treatment of contracts and licenses, and the risk the buyer inherits, so a well-drafted letter names the structure early rather than leaving it to the definitive agreement.

Key terms and clauses to include

A strong letter of intent to buy a business summarizes the economics and flags the conditions to closing while keeping the binding provisions tightly drawn. The core provisions are:

• Parties and target. Identify the buyer, the seller, and the business being acquired, including whether the deal is structured as an asset purchase or a stock or equity purchase.
• Purchase price and structure. State the proposed price, how it was derived (for example a multiple of earnings), and the mix of cash, seller financing, earn-out, or rollover equity, along with any working capital adjustment.
• Deposit or earnest money. Note whether the buyer will place a deposit, how much, and the conditions under which it is refundable or applied at closing.
• Assets and liabilities. In an asset deal, describe which assets transfer and which liabilities the buyer assumes, and which the seller retains.
• Due diligence. Set the scope and period for reviewing financials, contracts, employees, litigation, tax, and regulatory matters, and make the buyer’s obligation to proceed conditional on satisfactory diligence.
• Exclusivity or no-shop. Bind the seller for a defined period not to solicit, negotiate, or accept competing offers, so the buyer can invest in diligence without being used to shop the deal.
• Confidentiality. Protect the seller’s financial and operational information and, often, the existence of the negotiation itself, usually reinforced by a separate non-disclosure agreement.
• Conditions to closing. List the contingencies, such as financing, third-party and landlord consents, regulatory approvals, and board or shareholder approval.
• Key employees and non-compete. Address whether the seller or key personnel will stay on through a transition, and whether the seller will sign a non-compete and non-solicitation covenant. Enforceability of non-competes varies by state.
• Representations, warranties, and indemnity. Signal the buyer’s expectation that the definitive agreement will include seller representations, an indemnity for breaches, and possibly an escrow or holdback to secure it.
• Expense allocation. State that each side bears its own costs, or specify any agreed sharing, so a failed deal does not spawn a fee dispute.
• Binding and non-binding provisions. Say plainly which clauses bind on signature and that the economic terms do not, to prevent the letter from being read as a contract to sell.
• Expiration and timeline. Give the offer a lapse date and a target signing and closing schedule to keep the process moving.
• Governing law and dispute resolution. Name the governing state law and how disputes over the binding provisions are resolved.

When you need one

You need a letter of intent to buy a business whenever you are ready to move a promising conversation into a structured deal but are not yet ready to spend on a full purchase agreement and comprehensive due diligence. It is the natural next step once a buyer has reviewed preliminary financials, formed a view on value, and wants the seller to stop entertaining other suitors while the parties dig in.

An LOI protects both sides. For the buyer, it locks in exclusivity so the investment in accountants, lawyers, and lender conversations is not wasted shopping the deal to a higher bidder, and it puts the seller on record about price and structure before diligence begins. For the seller, it screens for a serious, adequately funded buyer, sets a timeline that limits how long the business sits under a cloud of uncertainty, and confirms confidentiality so employees, customers, and competitors do not learn of the sale prematurely. Lenders and investors also frequently expect a signed LOI before they will commit time to underwriting the acquisition.

Common pitfalls

Several avoidable mistakes turn a helpful letter of intent into a liability:

• Accidentally binding the price. Loose language or conduct that looks like agreement on all essential terms can lead a court to treat the LOI as an enforceable contract to sell, defeating its purpose.
• A weak or missing no-shop. Without a real exclusivity period, the seller can use the buyer’s offer to solicit competing bids while the buyer funds diligence.
• Vague price mechanics. Failing to specify the working capital adjustment, earn-out formula, or how the price was derived invites a fight when the definitive agreement is drafted.
• Skipping the deposit terms. Leaving refundability unstated creates disputes if the deal collapses during diligence.
• Ignoring structure. Deferring the asset-versus-stock decision hides tax and liability consequences that should shape the price.
• No expiration. An open-ended letter lets a stale offer linger over a business whose performance may have changed.
• Silent expense allocation. Without a costs clause, a broken deal can spawn a dispute over who pays the advisers.
• Version chaos. Redlines traded by email leave both sides unsure which draft is current, and the signed letter gets lost before the definitive agreement is even started.

This is where disciplined contract management matters. A central contract repository keeps the letter of intent, the non-disclosure agreement, and every later draft in one searchable place with a full audit trail, so no version or deadline is lost. Renewal and deadline alerts flag the exclusivity period and the LOI’s expiration before they lapse, and approval workflows with eIDAS-compliant electronic signature move the letter to signature without email chaos, while reusable templates keep your standard terms consistent across deals. PactAI can prepare the review by scoring risk from 0 to 100, flagging conflicts between the LOI and the draft purchase agreement, running the text against a compliance playbook, and generating a plain-language executive summary, while your team makes the final call on every clause. Pactolane strips personal data before AI processing and hosts in Europe with AES-256 encryption, so sensitive deal terms stay protected. There is no .docx download here; a letter of intent to buy a business is only as strong as the discipline behind how it is drafted, stored, and carried through to the definitive agreement.

This page provides general legal information, not legal advice.