Most buyers treat the letter of intent like a formality. A handshake on paper. Something you fire off to signal you’re serious, then blow past on the way to diligence.
That framing will cost you. The LOI is where deals get made or quietly killed. The terms you set here become the floor for everything that follows: price, structure, exclusivity, your leverage at the closing table. And once those terms are on paper, walking them back without a defensible reason tanks your credibility with the broker and the seller.
Here is what actually matters in a letter of intent to buy a business, and where most first-time buyers get it wrong.
What a Letter of Intent to Buy a Business Actually Is
A letter of intent is a non-binding preliminary agreement between a buyer and seller that outlines the key terms of a proposed acquisition before a formal purchase agreement gets drafted.
Non-binding means neither party is legally obligated to close. But do not let that word lull you into treating the LOI casually. Several provisions inside it typically are binding: confidentiality obligations, the no-shop clause (exclusivity), and sometimes a breakup fee. Courts have also held buyers to LOI terms in disputes when conduct suggests both parties treated it as binding. Your attorney should review any LOI before you sign. No exceptions.
The LOI comes after you have done enough preliminary analysis to know you want to move forward, and before you spend real time and money on formal due diligence. In a typical SBA acquisition, the timeline runs roughly like this:
- Initial deal review and NDA
- Preliminary financial analysis (SDE calculation, DSCR modeling)
- Introductory call with the seller
- LOI submission and negotiation
- Signed LOI and exclusivity period begins
- Full due diligence
- SBA loan application and underwriting
- Purchase agreement and closing
The LOI triggers the exclusivity window. That is when you go deep.
The Core Terms Every LOI Should Cover
A well-structured letter of intent to buy a business does not need to be 20 pages. Most run 3 to 6 pages. But every word matters, because anything you leave vague here becomes a negotiation point later when the seller’s attorney has more leverage.
Purchase Price
State the total acquisition price. Specify whether it is an asset purchase or stock purchase. Most SBA-financed deals are structured as asset purchases, which matters for how goodwill gets allocated on the tax return and how lenders underwrite the deal. If you are unsure which structure applies, your M&A advisor or attorney can walk you through the implications before the LOI goes out.
Deal Structure
Break down how the purchase price is being funded. A typical SBA structure on a $2M acquisition might look like this:
- SBA 7(a) loan: $1.6M (80%)
- Seller note (full standby): $200K (10%)
- Buyer equity injection: $200K (10%)
The seller note portion is worth spelling out explicitly in the LOI. We achieve a 10-year full standby structure at 0% interest on over 90% of our deals. If you leave the note terms vague, sellers will push for shorter standby periods and interest during the SBA loan term. Lock it down early.
Exclusivity Period
The no-shop clause is arguably the most valuable provision in the LOI for the buyer. Standard exclusivity runs 60 to 90 days. During this window, the seller cannot market the business to other buyers or accept competing offers.
Earnest Money
Typical earnest money on a small business acquisition runs 1% to 3% of the purchase price. It signals commitment. Usually refundable if the deal falls apart during due diligence based on material findings, but the specific refund conditions need to be defined in the LOI itself.
Conditions to Closing
List what must be satisfied for the deal to close. These typically include satisfactory completion of due diligence, SBA financing approval, no material adverse change in the business during the exclusivity period, and seller cooperation on transition.
Confidentiality
Even though the LOI is largely non-binding, the confidentiality provisions are binding. The seller’s financial information, customer lists, and operational details stay private. Both parties agree not to disclose terms to third parties.
How to Price the Deal in Your LOI
Do not submit an LOI at a number you cannot defend with math.
Sellers and their brokers have seen every lowball offer. What they respond to is a well-supported number tied to real earnings. Not hope, not “market comps” pulled from a listing site. Actual verified cash flow run through a debt service model.
Here is how we build to a price. Take the seller’s discretionary earnings. Verify the add-backs (and yes, this means looking at the actual tax returns and bank statements, not just the broker’s recasting spreadsheet). Apply a market multiple. Then run the debt service model to see if the deal cash-flows at that price.
Say you’re evaluating a commercial cleaning company with $380K in SDE and a broker asking 3.5x, putting the asking price at $1.33M. You model the SBA loan on $1.33M over 10 years at current rates. Debt service comes out to roughly $175K per year. At $380K SDE, your DSCR is about 2.17x. That clears our minimum threshold of 2.0x comfortably.
In that case, you may offer at or near asking price. But if the same business had $260K in SDE, your DSCR at that price would be around 1.48x. Below our target. Your LOI price needs to come down to make the debt service work, or you need to negotiate a larger seller note on standby to reduce the SBA loan balance and monthly payment.
The LOI price should reflect what the business can support. Not what you’re willing to pay emotionally.
The Exclusivity Clause: Your Most Valuable Negotiating Tool
Buyers often negotiate hard on price and barely glance at the exclusivity terms.
That is backwards.
A 30-day exclusivity window is nearly worthless on an SBA deal. Between ordering quality of earnings, coordinating with the SBA lender, reviewing lease assignments, and getting through environmental checks, 30 days is not close to enough. You’ll be mid-diligence when your exclusivity expires and the seller has legal cover to take a backup offer. We have watched this play out enough times to know how it ends.
Push for 75 to 90 days minimum. Sellers will push back, often asking for 45 to 60 days. The compromise position we typically land on is 60 days with an option to extend 15 to 30 days if the SBA loan is in active underwriting. That extension clause matters more than most buyers realize, because SBA lenders have their own timelines and you cannot control those.
Also pay attention to what happens if the seller breaches exclusivity. Spell out a remedy in the LOI. At minimum, they should return your earnest money. Ideally, there is a breakup fee if they accept a competing offer during your exclusivity window.
Common LOI Mistakes That Kill Deals Later
All of the above matters. But here is the part where most buyers quietly lose their deals, sometimes weeks or months after the LOI is signed, because of terms they left soft or omitted entirely.
Being vague on seller note terms. Sellers agree to a note in the LOI, then negotiate the actual structure in the purchase agreement where their attorney has more leverage. Define the note: amount, interest rate (0% on standby), standby period (10 years), and payment trigger (only after SBA loan is paid off). This is not a detail you can afford to leave open.
Not addressing the transition period. If the seller’s plan is to take a check and disappear, your lender will flag it. The SBA expects a reasonable transition. Specify in the LOI that the seller agrees to a training and transition period of at least 90 days post-close. This protects you operationally and supports the lender’s comfort with the deal.
Skipping the material adverse change clause. What happens if the business loses a major customer between LOI signing and closing? You need language in the LOI that gives you the right to renegotiate or walk if the business materially changes during exclusivity. Without it, you may be stuck closing on a deal that is no longer what you underwrote.
Leaving SBA financing approval out of the conditions to closing. Your LOI should explicitly state that closing is contingent on obtaining SBA financing on terms satisfactory to the buyer. If your lender declines or conditions approval in a way that changes the deal economics, you need to be able to walk without losing your earnest money. Three words: satisfactory SBA financing.
Confusing non-binding with unimportant. Sophisticated sellers and their advisors will hold you to the spirit of LOI terms even when they are technically non-binding. If you price the deal at $2M in the LOI and then try to renegotiate to $1.7M after diligence without a specific finding that justifies the reduction, you will lose the deal and your reputation with that broker. Brokers talk to each other. That kind of thing follows you.
What Happens After the LOI Is Signed
The signed LOI kicks off the most intensive phase of the acquisition process. Things move fast from here, and if you are not already organized, you will feel it.
You will engage a CPA or quality of earnings firm to verify the financials. You will send a due diligence request list to the seller covering tax returns, bank statements, customer contracts, employee agreements, equipment records, and lease documents. You will submit your SBA loan application to a preferred SBA lender and begin the underwriting process in parallel.
We run diligence and SBA simultaneously wherever possible. Waiting to start the loan process until diligence is complete is how buyers blow past their exclusivity window and lose deals. The two workstreams can and should overlap.
The purchase agreement gets drafted by your attorney, typically after the first two weeks of diligence give you enough information to know you are proceeding. Negotiate the APA against the LOI terms. If the seller tries to walk back terms that were clearly established in the LOI, that is a red flag about what the working relationship will look like post-close.
Letter of Intent to Buy a Business: What to Do Before You Submit
Before you send a letter of intent to buy a business, confirm these four things:
- You have verified SDE with at least 2 years of tax returns. Not just the broker’s numbers.
- You have modeled the DSCR at your proposed price using current SBA loan terms.
- You have a sense of the lender you intend to use and their appetite for this deal type and industry.
- You are genuinely prepared to spend the time and money to close. Not just testing the seller’s reaction.
Submitting weak or exploratory LOIs is a fast way to burn your credibility with brokers. In our experience, the buyers who close consistently are the ones who submit fewer LOIs, not more, because each one is backed by real analysis. You want to be known as a buyer who closes. That reputation is worth more than any single deal.
Frequently Asked Questions
Is a letter of intent to buy a business legally binding?
Most of the letter of intent is non-binding, meaning neither party is obligated to close the transaction. However, certain provisions within the LOI are typically binding: the confidentiality clause, the exclusivity period, and any specified earnest money terms. Courts have in some cases enforced LOI terms based on the parties’ conduct. Always have your attorney review the document before signing.
How long does it take to negotiate an LOI?
Most LOI negotiations run 3 to 10 business days. If a broker is managing the process, initial terms often get exchanged within a week. More complex deals with significant seller note negotiations or earnest money disputes can stretch to 2 to 3 weeks. The goal is to move quickly, because until the LOI is signed you have no exclusivity and the seller can keep talking to other buyers.
How much earnest money is standard with a letter of intent?
Earnest money on small business acquisitions typically runs 1% to 3% of the purchase price. On a $1.5M deal, that is $15K to $45K. Higher earnest money strengthens your position as a serious buyer and can help in competitive situations. The refund conditions should be spelled out clearly in the LOI, including what constitutes a valid basis for the buyer to exit and recover the deposit.
Can you use an SBA loan after signing an LOI?
Yes. The LOI is signed before the SBA loan application is submitted. The exclusivity window created by the LOI gives you the time to complete SBA underwriting, which typically runs 45 to 75 days from application submission to approval. Your LOI should make closing contingent on obtaining satisfactory SBA financing, so you have an exit if the loan does not come through.
What is the difference between an LOI and a purchase agreement?
The letter of intent outlines the proposed deal terms at a high level and is mostly non-binding. The purchase agreement (also called the asset purchase agreement or APA) is the final, legally binding contract that governs the transaction. The APA is longer, more detailed, and gets drafted after due diligence is substantially complete. Think of the LOI as the term sheet and the APA as the full contract.
Ready to Put an LOI on Your First Deal?
A letter of intent to buy a business is only as strong as the deal structure behind it. Price support, seller note terms, DSCR modeling, and SBA contingency language are not afterthoughts. They are the foundation.
Regalis Capital handles the full acquisition process: deal sourcing, financial modeling, LOI drafting, SBA coordination, and closing. If you want a team that has been through this process hundreds of times and knows exactly where buyers lose deals, start here.