What is an LOI, and which parts of it are binding?
A letter of intent sets out the deal you and the seller believe you have agreed: price, structure, what is included, and how long you get to verify it. Most of it is not binding — but the exclusivity, confidentiality and expense clauses usually are.
What it does
An LOI turns a conversation into a plan with dates on it. It buys a period of exclusivity in which to run diligence and arrange financing, and it forces both sides to say out loud what they think they agreed, before anyone spends money on lawyers.
Binding and non-binding, in the same document
| Typically not binding | Typically binding |
|---|---|
| Price and payment structure | Exclusivity / no-shop period |
| Which assets and liabilities transfer | Confidentiality |
| Closing date and conditions | Who pays which expenses |
| Employment or consulting for the seller | Governing law and dispute resolution |
Which clauses bind depends on the wording, not on the heading. This is a question for your attorney, and one of the cheapest hours you will buy.
What to settle before you sign
- Price mechanics, not just the price. Cash at closing, a seller note, or something contingent on performance? On an SBA-financed purchase the structure is constrained by the lender's rules.
- Asset or stock sale. It changes tax, liabilities and which contracts survive.
- The diligence window. Long enough to obtain tax returns, the lease and lender approval — not the thirty days a fast timetable suggests.
- What kills the deal. Financing, landlord consent, licence transfer, a minimum earnings figure: name them as conditions or lose the right to walk away cleanly.
- The seller's role afterwards. Training and transition, in writing. SBA rules limit a seller's involvement after a change of ownership, so an informal "I'll stay on for a year" can conflict with the loan.
The mistake that costs the most
Signing an LOI before anyone has tested the earnings. Exclusivity runs from signature, so a buyer who starts verifying afterwards burns their own clock — and by the time the numbers come apart, they have spent weeks, legal fees and negotiating leverage. Establish that the deal deserves diligence first; sign second.
Questions buyers ask
Is a letter of intent legally binding?
Usually only in part. Price, structure and closing terms are normally stated as non-binding, while exclusivity, confidentiality, expense allocation and governing law are drafted to bind. What actually binds depends on the wording, so have an attorney read it before you sign.
How long should the diligence period be?
Long enough to obtain tax returns, the lease and landlord consent, licence transfers and lender approval. On an SBA-financed small acquisition that is commonly 60 to 90 days.
Related
- Quality of Earnings (QoE) — A Quality of Earnings report is an accountant's deep check that the profit a seller reports is real, repeatable and properly earned.
- Debt Service Coverage Ratio (DSCR) — DSCR is the cash a business produces divided by the loan payments it owes.
- Confidential Information Memorandum (CIM) — A CIM is the packet a broker sends once you have signed an NDA: the story of the business, its numbers, its customers and the reason for selling.
Checking a real deal? DealLoupe reads the documents a seller gave you and reports the red flags, the gaps and the questions to ask — before you spend anything on due diligence. See what a pre-screen costs →
Last updated: 2026-08-22