LOI Contingencies: What to Include and What to Skip

There is a version of this conversation that starts with the listing price. That is the wrong version.

Most buyers treat the LOI like a formality. Get the price agreed, sign it fast, move on to diligence. That mindset costs people deals. Or worse, it costs them leverage at exactly the moment they need it most.

LOI contingencies are not legal protection in the traditional sense. The LOI itself is mostly non-binding. But the contingencies you include, and the ones you leave out, shape every negotiation that comes after it. Think of them as the operating rules for the rest of the transaction. Get them wrong and you spend the next 60 days fighting battles you should have won on page two of the LOI.

What Are LOI Contingencies?

LOI contingencies are conditions written into a letter of intent that must be satisfied before a deal can close. They are the buyer’s written list of “we proceed only if” statements.

Common examples include financing approval, a clean due diligence review, landlord consent on a lease assignment, key employee retention, or a satisfactory review of the seller’s tax returns. Nothing exotic. All standard. But the way they are worded, and which ones show up, matters more than most buyers realize.

Here is the distinction that actually counts: most of the LOI is non-binding, but contingencies carry weight even in a non-binding document. They set the negotiating table for everything that follows. A seller who signs an LOI with your financing contingency in it cannot credibly argue later that your lender’s requirements are your problem. That precedent gets established before any lawyer drafts a single page of the APA.

The Four Contingencies Every SBA Buyer Needs

If you are financing a business acquisition with an SBA 7(a) loan, these four belong in every LOI you submit. No exceptions.

1. Financing contingency

State clearly that the deal is contingent on obtaining SBA financing on terms acceptable to the buyer. Keep the language clean: “Buyer’s obligation to close is contingent upon obtaining SBA 7(a) financing at terms and conditions satisfactory to Buyer.”

Do not write in specific rates or loan amounts. The market moves. Your deal structure may shift during underwriting. You want flexibility, not a number that pins you to terms your lender never agreed to.

2. Due diligence contingency

This covers your right to review financial statements, tax returns, contracts, lease agreements, and operational records. Typically written as a 30 to 60 day window from LOI execution.

If something material turns up during diligence, this contingency is how you walk away or renegotiate. Without it, you are morally committed to a price you agreed to with incomplete information. And incomplete information is the default state at the LOI stage. Three years of tax returns, bank statements, vendor contracts, customer concentration data, employee agreements, the lease itself (which, honestly, most buyers do not read carefully enough the first time around). All of that lives behind the due diligence contingency.

3. Lease assignment contingency

If the business operates from a physical location, the existing lease almost certainly needs to transfer to you as the new owner. Landlords can refuse. They can demand new terms. They can impose personal guarantees or escalate the rent.

This contingency protects you from closing on a business and then discovering the landlord will not cooperate, or wants double the current rent, or has their own right-of-first-offer on a sale of the business. We have watched deals that were fully underwritten, fully approved by the lender, and ready to fund get killed by a landlord who decided they wanted a different tenant. That risk belongs in the LOI.

4. Seller note structure

If you intend to include a seller note as part of the deal, the LOI should specify the expected terms. For SBA deals, the standard we push for is a 10-year full standby, 0% interest seller note. We achieve those terms on roughly 90% of our deals.

Getting this in the LOI matters. Sellers will agree to things in principle upfront that they later resist when attorneys are involved and they have had time to reconsider. Anchoring the seller note terms early, before positions harden, is one of the highest-leverage moves in the entire deal process.

What LOI Contingencies Most Buyers Miss

The four above are table stakes. These next ones show up far less often, and they matter.

Key employee retention

If two or three employees are responsible for the majority of the revenue, or if the business would functionally collapse without a specific technician, estimator, or manager, write that in. Something like: “Closing is contingent on Buyer’s satisfaction that key employees identified in Schedule A have agreed to remain with the business post-close under terms acceptable to Buyer.”

Vague is fine here. You are not promising anyone a contract at the LOI stage. You are preserving leverage.

Representation and warranty accuracy

Some buyers include a contingency that the seller’s written representations about the business remain accurate as of closing. Financial condition, absence of litigation, ownership of assets.

This is not a substitute for reps and warranties in the Asset Purchase Agreement, but flagging it in the LOI makes the seller aware from day one that you expect consistency between what they told you and what you find. That sets the tone for diligence.

Working capital target

On SBA deals, you will likely need to negotiate a working capital amount, either funded through the SBA loan itself or left in the business at close. If you have a specific working capital requirement, name it in the LOI. We generally tell buyers to plan for 2 to 6 months of working capital depending on the business. That is non-negotiable.

Otherwise, sellers frequently strip accounts receivable and run down inventory before close, leaving you undercapitalized on day one. And undercapitalized on day one is how otherwise sound acquisitions fail.

LOI Contingencies That Create More Problems Than They Solve

All of that matters, but here is the part most buyers get wrong.

Not everything belongs in an LOI. Including too many contingencies signals inexperience or bad faith, and it can crater a deal before diligence starts.

Approval by buyer’s spouse or partner

This is a real one that shows up. It makes you look like you are not the actual decision-maker. Do your buy-in conversations before you submit the LOI. Not after.

Overly specific financial thresholds

Some buyers try to write in that the business must maintain a specific revenue or EBITDA figure between LOI and close. In theory this is reasonable. In practice, it creates constant tension and disputes over normal business fluctuation. A service business has a slow month and suddenly the buyer wants to renegotiate? That is not a productive dynamic.

The better approach: use your due diligence contingency for material financial concerns, and address business performance in the reps and warranties section of the APA.

Regulatory approvals without specificity

If a specific license or permit transfer is genuinely required (liquor licenses, healthcare provider numbers, certain contractor licenses), name it explicitly. A vague “all regulatory approvals” contingency invites disputes about what that covers.

Specific is always better than general when it comes to contingencies. Every time.

How LOI Contingencies Affect SBA Underwriting

This is where most buyers do not connect the dots.

Your SBA lender reviews the LOI as part of the credit package. They are reading it. Lenders want to see that the deal structure is clean and that contingencies are reasonable and resolvable within the underwriting timeline.

A financing contingency that names SBA 7(a) as the vehicle tells the lender you have been upfront with the seller about how this is getting done. That matters more than it seems. Sellers who are surprised by SBA requirements mid-process (the injection requirement, the standby requirement on seller notes, the insurance requirements) create friction and delays that can blow up a closing timeline.

But here is the practical piece. An open-ended due diligence window that does not have a defined end date raises flags. Lenders and sellers both want a timeline. 30 to 45 days for due diligence, with a clear exclusivity period, is standard.

The debt service coverage ratio check happens during underwriting, not at the LOI stage. Your lender is going to stress-test whether the business can cover the SBA loan payment, and if your target is a 2x DSCR (which it should be), that math needs to work with the full deal structure modeled in. So if you have already negotiated your seller note terms and put them in the LOI, your lender can model everything from the start. That speeds up credit approval.

From what we see across the deals we work on, the cleanest LOIs close fastest. Not the most favorable to the buyer on every single point. The cleanest. Specificity and reasonable terms get deals done.

Negotiating LOI Contingencies With a Seller

Sellers have read enough deal lore to know that contingencies give buyers options to walk away. Some sellers will push back on certain language, particularly open-ended due diligence contingencies or any clause that references “satisfactory to Buyer” without a defined standard.

A few practical notes on this.

Put your financing contingency in every deal. Non-negotiable. If a seller refuses to accept that you need SBA approval to close, that tells you something about either their understanding of SBA deals or their willingness to work through a process. Either way, useful information.

Keep your due diligence contingency time-boxed. “30 days from LOI execution” is better than “until Buyer completes due diligence.” It signals you are serious. It gives the seller a timeline. And 30 days is enough to identify the issues that would kill a deal.

On seller note terms, expect pushback. A 10-year standby at 0% is not a seller-friendly structure on its face. You get there by explaining the SBA underwriting requirements, specifically that a seller note on anything other than full standby creates a debt service obligation that compresses the DSCR and can kill the lender’s credit approval. Most sellers would rather have a note with those terms than no deal at all. But you need the LOI to anchor the conversation before attorneys get involved and positions harden.

If a seller is uncomfortable with a specific contingency, ask them why. Legitimate concerns are usually addressable with tighter language. A seller who just wants fewer outs for the buyer is showing you their negotiating posture early.

The Bigger Picture on LOI Contingencies and Deal Structure

The LOI is not the finish line. It is the start of the real work.

But the contingencies in your LOI define the scope of that work. They tell the seller what you need. They tell your lender how the deal is structured. They give your attorney the roadmap for drafting the APA. And they tell the broker whether you have done this before or whether you are figuring it out as you go.

Getting them right is not about being aggressive. It is about being clear. Every contingency you include should have a specific purpose. Every one you leave out should be a deliberate choice, not an oversight.

On a $1.5M deal with an SBA 7(a) loan, a weak LOI that does not address lease assignment or seller note structure can cost you weeks of renegotiation after the seller has already mentally moved on. That is time, money, and goodwill you will not get back.

Write the LOI like someone who has closed deals before. The seller’s broker has seen hundreds of LOIs. So has the SBA lender. Both of them are making judgments about you based on what they see on page one.

Frequently Asked Questions

What is the purpose of LOI contingencies?

LOI contingencies are conditions that must be satisfied before a deal can close. They protect the buyer by preserving the right to walk away or renegotiate if specific circumstances are not met, such as failing to obtain financing, discovering material issues in due diligence, or a landlord refusing to assign a lease to the new owner.

Are LOI contingencies legally binding?

Most LOIs are non-binding, which means the contingencies do not create enforceable obligations the way a purchase agreement would. However, they create a negotiated framework both parties rely on going forward. A seller who signs an LOI with your financing contingency included cannot reasonably object to SBA requirements later in the process. The precedent is set.

What LOI contingencies does SBA require?

SBA does not dictate specific LOI language, but lenders expect to see a financing contingency naming SBA 7(a) as the loan vehicle, a defined due diligence period, and a seller note structure consistent with SBA guidelines (per SBA SOP 50 10). The cleaner and more specific the LOI, the smoother underwriting tends to go.

How long should the due diligence period be in an LOI?

For most business acquisitions in the $500K to $5M range, 30 to 45 days is standard. That is enough time to review 3 years of financial statements, tax returns, key contracts, and operational details. An open-ended window without a defined end date creates friction with sellers and raises questions for lenders. Give yourself a real timeline, not an indefinite one.

Can a seller refuse to accept a financing contingency?

A seller can refuse any LOI terms. But a seller who refuses a standard financing contingency on an SBA deal is either unaware of how SBA lending works or not a serious counterparty. Most experienced sellers and their brokers understand that SBA approval is a real condition that takes time, and they expect to see a financing contingency in any LOI where the buyer is not paying all cash.

Work With a Team That Knows How to Structure Deals

LOI contingencies are one piece of a deal structure that has to hold together from first offer through closing. Get the LOI wrong and you spend the rest of the deal fixing what should have been settled upfront.

Regalis Capital works with buyers on every part of that process: finding the right deal, building a structure that clears SBA underwriting, negotiating terms that protect the buyer without killing the deal, and managing everything from LOI to close.

If you are serious about acquiring a business and want a team that does this every day, start here.