LOI Terms Review Before You Commit to a Deal

Overview

A letter of intent can feel like a breakthrough: the buyer has stated a price, both sides have a path forward, and confidential diligence can begin. But an LOI terms review is where the commercial reality of the proposed transaction becomes visible. A headline purchase price may look attractive while the actual terms shift risk, delay payment, restrict alternatives, or make financing unlikely.

For a business sale or acquisition, the LOI is not simply a preliminary document to sign quickly. It is the framework that determines what the parties will spend the next several weeks or months investigating, negotiating, and documenting. Before either side commits meaningful time and professional fees, the economic terms should be clear enough to support a workable closing.

What an LOI Terms Review Should Accomplish

Most letters of intent are largely nonbinding as to the obligation to close. That does not make them casual. Certain provisions, including confidentiality, exclusivity, access to records, expenses, and governing law, may be expressly binding. More significantly, even nonbinding business terms often create negotiating momentum. Once a seller accepts a structure, changing it later can be difficult without undermining confidence in the deal.

A disciplined review tests whether the LOI reflects the real agreement the parties believe they are making. The question is not merely, "Is the price acceptable?" It is whether the buyer can fund the transaction, whether the seller can deliver the assets and cash flow described, and whether the conditions for closing are specific enough to manage.

For owner-operated businesses, this distinction matters. A $1.5 million offer with a substantial seller note, a performance-based earnout, and broad diligence outs is economically different from a $1.25 million cash-at-closing offer with a credible lender commitment. Neither structure is automatically better. The appropriate choice depends on tax considerations, buyer strength, business stability, transition needs, and the seller's willingness to retain risk after closing.

Review the Economics Beyond the Purchase Price

The LOI should state the proposed purchase price and, just as importantly, explain how and when it will be paid. If the number is not tied to a clear payment structure, both parties may be interpreting the offer differently.

Cash at closing, seller financing, and earnouts

A buyer may propose cash at closing, an SBA-backed loan , conventional financing, a seller note, rollover equity, or some combination. Each source has its own practical implications. Lender financing can increase cash to the seller at closing, but it introduces underwriting requirements, appraisal or valuation questions, debt-service coverage tests, and lender-driven closing conditions. A seller note may bridge a valuation gap or improve lender approval odds, but it exposes the seller to collection risk and creates questions about security, subordination, interest, maturity, and default remedies.

Earnouts deserve particular attention. They may be appropriate when future revenue is uncertain or when a business depends heavily on a transition period. They also create potential disputes over how revenue, expenses, staffing, capital expenditures, and customer relationships will be managed after closing. An LOI does not need to resolve every calculation detail, but it should identify the metric, measurement period, payment cap, and core operating assumptions.

Working capital and assumed liabilities

In many small and middle-market business transactions, buyers acquire specified assets rather than the legal entity itself. The LOI should identify whether the transaction is expected to be an asset purchase , stock purchase, membership-interest purchase, or another structure subject to further legal and tax review.

It should also address what transfers. Inventory, accounts receivable, prepaid deposits, customer contracts, intellectual property, vehicles, equipment, gift cards, employee obligations, and vendor balances can materially affect value. A buyer who assumes more liabilities may reasonably view the stated price differently than a buyer purchasing assets free of ordinary operating obligations.

Working capital is often overlooked in early discussions. For a stable service business with immediate collections and limited inventory, a detailed working-capital adjustment may not be necessary. For a distributor, retailer, e-commerce operator, or business with significant receivables and inventory, it may be central to the economics. The LOI should at least establish whether normal working capital is included, excluded, or subject to a closing adjustment.

LOI Terms Review for Diligence and Financing

Diligence is not an unlimited right to revisit every aspect of the bargain. The LOI should define a reasonable diligence period, the categories of information expected, and the conditions the buyer must satisfy before closing. Vague language such as "subject to satisfactory due diligence" gives the buyer broad flexibility. That may be acceptable where the business records are incomplete or the buyer has not yet had sufficient access. It may be less appropriate when the buyer has already reviewed financial statements, tax returns, lease terms, and operating data.

A financing contingency requires similar precision. A buyer should not promise certainty before a lender has reviewed the opportunity. At the same time, a seller should understand whether the buyer has been prequalified, whether the proposed capital structure fits typical underwriting standards, and how long financing approval is likely to take.

Useful LOI terms often include a financing deadline, a required buyer deposit, notice obligations if financing is denied, and clarity on whether the buyer must pursue alternative financing in good faith. The level of detail depends on the transaction. A cash buyer may need fewer financing provisions, while a leveraged acquisition requires more coordination between the buyer, lender, seller, and broker.

Protect the Business During Exclusivity

Exclusivity, sometimes called a no-shop period, is frequently the most consequential binding provision in an LOI. In exchange for a seller removing the business from active negotiations, the buyer receives time to conduct diligence and arrange financing without competing offers.

For sellers, an overly long exclusivity period can be costly. The business may lose market momentum while the buyer continues to investigate, renegotiate, or fail to secure funding. For buyers, an exclusivity period that is too short can make a thorough review impossible, particularly when a landlord consent, licensing transfer, franchisor approval, or lender underwriting is required.

The practical solution is a defined period tied to an achievable transaction schedule. The LOI should state whether the seller may continue limited marketing activity, how extensions are handled, and what happens if the buyer misses diligence or financing milestones. A buyer who requests exclusivity should be prepared to provide requested documents promptly, retain appropriate advisors, and maintain regular communication.

Address Transition, Employees, and Third-Party Consents

Many transactions succeed or fail after the purchase agreement is signed because transition expectations were never addressed at the LOI stage. If the seller's relationships, licenses, operational knowledge, or personal production are central to revenue, the buyer needs clarity on post-closing support.

The LOI can outline the anticipated transition period, expected hours, consulting compensation if any, and whether the seller will introduce key customers, vendors, employees, or referral sources. It can also identify whether employees are expected to receive new offers of employment. These provisions should remain commercially realistic. A seller cannot guarantee that customers or staff will stay, but the seller can agree to reasonable cooperation.

Third-party approvals should be identified early. A lease assignment, landlord consent, franchise approval, government license transfer, vendor consent, or contract assignment may be a closing condition. If a critical consent is unlikely, the transaction may require a different structure or a revised timeline.

Keep Legal, Tax, and Brokerage Roles Clear

A broker can coordinate LOI discussions, help compare offers, organize financial information, and keep the process moving. However, the enforceability of a letter of intent, tax consequences, entity structure, representations, indemnification, and employment issues require review by qualified attorneys and CPAs. Lenders independently determine credit approval and loan terms.

That division of responsibility protects both parties. A commercially sound LOI still needs legal drafting that matches the parties' intentions, particularly where binding obligations are involved. Buyers and sellers should raise concerns before signing, not assume they can be repaired later in the purchase agreement.

A well-run LOI process does not demand that every issue be settled immediately. It does require that the major economic risks be surfaced while both parties still have room to make an informed decision. When price, payment, diligence, exclusivity, transition, and closing conditions align, the deal has a credible foundation. When they do not, identifying that gap early is usually far less expensive than discovering it after the business has been off the market for months.