A non-binding letter of intent sounds like a contradiction. You sign a document that does not obligate you to do anything. So why does it matter?

It matters because the LOI sets every material term that gets built into the final purchase agreement. Price, structure, financing contingencies, exclusivity, timeline. The “non-binding” part does not mean the document is meaningless. It means the deal can still fall apart if due diligence surfaces problems. But if nothing surfaces, what you agreed to in the LOI is what closes.

Get the LOI wrong and you spend 60 to 90 days in diligence defending a deal structure that never should have been agreed to on page one.

What “Non-Binding” Actually Means (and What It Does Not)

A non-binding letter of intent is a written offer that outlines the proposed terms of a business acquisition without creating a legally enforceable obligation to complete the transaction. Both parties agree on the deal structure in principle, with the understanding that the final purchase agreement will govern the actual sale.

Non-binding means most of the economic terms are not enforceable. If the seller refuses to close at the agreed price after due diligence, you cannot force the sale.

What IS typically binding, even when the rest is not:

  • Exclusivity clause (no-shop provision): The seller agrees not to talk to other buyers for a defined period, usually 30 to 90 days.
  • Confidentiality provisions: Both parties agree to keep deal terms and information shared during diligence private.
  • Governing law: Which state’s laws apply if there is a dispute.
  • Expense allocation: Who pays for what if the deal falls apart. Attorney fees, accountant fees, lender costs.

Those four provisions typically survive even if the broader LOI is characterized as non-binding. Your attorney should confirm which provisions are carved out as binding before you sign anything.

What to Include in a Non-Binding Letter of Intent

Most LOIs in the $500K to $5M acquisition range cover the same core terms. Here is what needs to be in every non-binding letter of intent you submit.

Purchase price. The total consideration being offered. State whether this is an asset purchase or a stock purchase. In the overwhelming majority of SBA-financed acquisitions, it is an asset purchase.

Deal structure. How the purchase price is being financed. A typical SBA deal structure would read something like: $1.5M purchase price, $1.35M SBA 7(a) loan, $150K buyer equity injection, seller note of $150K on full standby for 24 months post-close. Those exact numbers need to be in the LOI.

Seller note terms. If you are asking for a seller note (and you should be on most deals), define the amount, interest rate, term, and standby period. On the deals we structure, we target a 10-year full standby note at 0% interest. That is not standard industry practice, but we achieve it on more than 90% of our deals. The LOI is where you lock it in.

Working capital. Will a normalized level of working capital be included in the purchase price or negotiated separately? Leaving this vague creates expensive arguments at the closing table. We view working capital as non-negotiable. Budget for 2 to 6 months depending on the business type, and spell that out in the LOI so there is no ambiguity about what the buyer needs at close.

Assets and liabilities included. For an asset purchase, specify what transfers: equipment, customer contracts, intellectual property, goodwill. Typically excluded: accounts receivable, existing debt, pending litigation. Do not use language like “all business assets.” That is too vague and sellers sometimes interpret it to include personal equipment on the premises.

Exclusivity period. How long the seller is locked out from marketing to other buyers while you complete diligence. 45 to 60 days is standard for an SBA deal.

Due diligence conditions. List the key diligence items that, if unsatisfactory, allow you to walk away. Financial records, tax returns, customer concentration analysis, key employee agreements.

Financing contingency. The deal is contingent on securing SBA 7(a) financing on acceptable terms. Do not let a seller or broker talk you out of this clause.

Target close date. An aspirational date keeps everyone accountable. SBA deals typically close 60 to 90 days after an accepted LOI.

The Binding vs. Non-Binding Distinction in SBA Deals

Here is something most first-time buyers get wrong: the SBA lender cares about your LOI.

Before a lender will issue a term sheet or begin underwriting, they want to see an executed LOI. Not a final purchase agreement. The LOI is what triggers the formal financing process.

And this means your LOI needs to be detailed enough to satisfy the lender’s preliminary review. Vague LOIs slow down underwriting. A lender reviewing an LOI that reads “purchase price TBD, structure to be negotiated” cannot do anything with that.

Include the full deal structure. Purchase price, loan amount, equity injection, seller note amount and terms, asset list, exclusivity period. The more complete the LOI, the faster the lender moves.

One more thing worth knowing: some lenders will not issue a formal SBA commitment letter until they have reviewed and approved the LOI terms. If your deal structure changes materially after LOI and lender pre-approval, you may be starting the underwriting process over.

Common LOI Mistakes That Kill Deals Later

Leaving the seller note terms vague. If the LOI says “seller will carry a note” without specifying standby terms, interest rate, or balloon schedule, you will fight about it during the purchase agreement negotiation. Define it now.

No financing contingency. Accepting an LOI without a financing contingency means you are obligated (morally if not legally) to proceed even if you cannot get SBA approval. Keep the contingency in.

Exclusivity period too short. 30 days is not enough time to complete SBA underwriting and diligence on a mid-market deal. Ask for 60 days minimum, with an option to extend for 15 to 30 days if underwriting is in progress.

Not defining the asset list. List what transfers. Line items. Brokers sometimes use vague language in their templates and that vagueness costs buyers real money at the closing table.

Accepting seller-drafted LOI language without review. Some brokers provide a standard LOI template. That template is not written in your favor (the broker represents the seller, not you). Have your acquisition attorney review any LOI before you sign, whether you are the one submitting it or responding to a seller-provided draft.

How to Use the Non-Binding LOI as a Negotiating Tool

So here is where most buyers underestimate the LOI. It is not a formality. It is your best opportunity to set the terms before attorneys and lenders are deeply involved.

Once a purchase agreement is being negotiated, every change creates friction and renegotiation costs. Getting the structure right in the LOI is significantly easier and cheaper than trying to fix it in the APA.

Three things to push hard for at the LOI stage:

Seller note on full standby. SBA requires that seller notes be on full standby during the SBA loan term for the note to count as equity in the deal structure. Some sellers push back on this. Some do not fully understand what standby means. Explain it early and lock it in the LOI.

Inventory treatment. Businesses with physical inventory often have disputes about what the inventory value is at close. Either exclude inventory from the purchase price and conduct a physical count at closing (adding it separately), or include a specific inventory amount with a true-up mechanism.

Key employee and lease assignments. If the business depends on a key employee or a landlord must consent to a lease assignment, flag this as a diligence condition in the LOI. It gives you a clean out if those assignments cannot be secured.

What Happens After the LOI Is Signed

Once both parties execute the non-binding letter of intent, the exclusivity clock starts. And from this point, everything runs on the timeline you agreed to, so the structure you locked in matters.

The first 2 to 3 weeks typically go to financial diligence. You are verifying that the seller’s discretionary earnings number holds up. You are looking at 3 years of tax returns, comparing them to P&L statements, and normalizing for add-backs.

This is where proof of cash matters. If the bank statements do not tie to the tax returns, the reported SDE number is suspect. A deal advertised at $400K in SDE that actually comes in at $310K after proper add-back analysis changes the debt service coverage ratio significantly.

On a $1.5M deal at a 10-year SBA term with a rate of roughly prime plus 2.75%, your annual debt service is somewhere around $190K to $210K depending on the exact rate. At $310K SDE, your DSCR is around 1.5x. That is the floor, not the target.

At $400K SDE, your DSCR is around 1.9x to 2x. Comfortable.

And do not forget: working capital is part of your closing cost picture. If you need $50K to $100K in working capital on top of the purchase price, that affects the total cash you need and the overall economics of the deal. This should already be defined in the LOI (which is why we insist on spelling it out early).

Weeks 3 through 6 typically involve lender underwriting, quality of earnings review on larger deals, lease review, and beginning the purchase agreement draft.

Weeks 6 through 10 are legal documentation, SBA conditional commitment, seller-related transfers, and pre-close conditions.

If something material surfaces in diligence, the non-binding nature of the LOI is what allows you to renegotiate or walk without legal exposure. That is the actual purpose of keeping most terms non-binding.

For a closer look at how we structure the full LOI and APA process for SBA-financed acquisitions, see our deal process overview.

Frequently Asked Questions

Is a non-binding letter of intent legally enforceable?

Most terms in a non-binding LOI are not legally enforceable. However, specific provisions are typically carved out as binding, including the exclusivity clause, confidentiality terms, and expense allocation. Have an attorney review which provisions are binding in your specific document before signing. Do not assume “non-binding” means the entire document is without consequence.

Can a seller back out after signing a non-binding letter of intent?

Yes. Because the LOI is non-binding on economic terms, a seller can walk away before a purchase agreement is signed. They cannot market the business to other buyers during the exclusivity period without violating that specific binding provision. If a seller backs out after you have incurred diligence costs, your recourse is limited unless the LOI’s binding provisions were breached.

Does a non-binding letter of intent need to include the full deal structure?

Yes, especially on SBA-financed deals. The lender needs to see your proposed deal structure (purchase price, equity injection, loan amount, seller note terms) before beginning underwriting. An LOI that is vague on structure will slow down the SBA process and may require revision before the lender can proceed.

How long should exclusivity last in a letter of intent?

For SBA deals in the $500K to $5M range, request 60 days minimum. SBA underwriting alone typically takes 30 to 45 days after a complete submission. Adding in due diligence, attorney review, and the purchase agreement draft, 60 days is the floor. Build in a 15 to 30 day extension option if underwriting is still in progress.

What is the difference between a letter of intent and a purchase agreement?

A non-binding letter of intent outlines proposed deal terms before due diligence and formal underwriting. It is the agreement to agree. A purchase agreement is the legally binding contract that governs the actual sale. The APA is negotiated after the LOI is signed, due diligence is completed, and financing is confirmed. LOI terms heavily influence what goes into the APA.

Ready to Structure Your Acquisition?

Regalis Capital handles buy-side acquisitions from deal sourcing through close. We write and negotiate LOIs, manage the SBA process, and work directly with lenders to get deals financed on terms that work.

If you are looking at a deal and want to make sure the non-binding letter of intent is structured right before you commit, start here.