Reviewing a Letter of Intent as Seller

Most sellers treat the LOI like a formality. A handshake on paper. Something to sign so the process can move forward.

That costs sellers real money.

The letter of intent is the single most important document you will negotiate before the purchase agreement lands on your desk. Once you sign it, nearly everything inside becomes the baseline for that purchase agreement. What you agree to here sets the rails for the rest of the deal. Understanding every term, before your signature hits the page, is the difference between a deal that closes well and one that unravels or quietly bleeds you of proceeds you thought were yours.

What a Letter of Intent Actually Is

A letter of intent is a non-binding agreement that outlines the core terms of a proposed acquisition before the formal purchase agreement gets drafted. Non-binding on price and structure, mostly. But binding on a few critical provisions, including the exclusivity period and confidentiality obligations.

When a buyer submits an LOI, they are saying: here is how I want to buy your business, at this price, under these terms. Your job as the seller is to read that document like someone who knows what those terms actually mean once they hit a closing table.

Most sellers do not do this. They look at the number at the top and either accept or counter. The rest of the document goes largely unread until an attorney flags a problem during the purchase agreement phase. That rest of the document governs things like working capital targets, seller note terms, indemnification caps, and reps and warranties.

By then, you have already handed the buyer 30 to 60 days of exclusivity and significant negotiating leverage.

The Purchase Price Is Not Just the Number at the Top

The headline number in an LOI is not what you will walk away with. It rarely is.

The actual consideration, meaning what ends up in your pocket at close, is shaped by several mechanics that are often buried in the deal structure section. We have watched sellers lose $100K or more in expected proceeds because they never did the math on these components before signing.

Working capital targets. Most LOIs include a working capital peg: a baseline level of current assets minus current liabilities that must be present in the business at close. If the business closes with working capital below that peg, the difference gets subtracted from the purchase price. This adjustment can easily swing $50K to $150K or more on a $1M to $2M deal. That is not a rounding error.

Seller notes. If part of the purchase price is structured as a seller note, the terms of that note matter enormously. On SBA-financed deals, seller notes are typically placed on full standby for up to 10 years at 0% interest. That is standard on most SBA transactions and is not a red flag. We see this on roughly 90% of the deals we work on. But a seller note with a shorter standby period, a higher interest rate, or subordinated repayment terms tied to earnout milestones is a different animal entirely. Read those terms.

Earnouts. Some buyers propose earnout provisions where a portion of the purchase price is contingent on the business hitting certain financial targets post-close. We see these most often when there is a gap between the seller’s valuation expectations and what the buyer’s SBA underwriting supports. Earnouts can be legitimate. But they shift risk to the seller. If an earnout represents more than 10% to 15% of the total deal value, scrutinize it closely.

Escrow holdbacks. Buyers may request that a portion of the purchase price (commonly 5% to 10%) be held in escrow post-close for indemnification claims. This is normal on transactions above $1M. Understand the duration, which is typically 12 to 24 months, and the claim threshold before agreeing.

Before you sign anything, sit down with a calculator. Add up the seller note, the estimated working capital adjustment, the escrow holdback, and any closing costs. What is left is what you are actually agreeing to.

Exclusivity: The Clause That Locks You In

Every LOI includes an exclusivity period, also called a no-shop clause. During this window, you agree not to market the business, entertain other offers, or negotiate with other potential buyers. This is where the real risk sits for sellers who have not read the fine print.

Exclusivity periods on SBA-financed deals typically run 60 to 90 days. That is the realistic time needed for due diligence, SBA lender underwriting, and document preparation.

If a buyer asks for 120 days or longer, push back. A longer exclusivity period without a firm financing commitment creates a window where a buyer can drag out diligence, find a renegotiation angle, or walk away. All while you have been locked out of the market.

Request a clear milestone schedule tied to the exclusivity period. If the buyer has not submitted a complete SBA package to the lender within 30 days, the exclusivity should reset or terminate. Your attorney can add this language. It is standard, and serious buyers will not object.

And watch for automatic extensions. Some LOIs include provisions that extend the no-shop period if due diligence is still ongoing. Without a hard end date, you can find yourself locked up for five or six months with nothing to show for it.

What the Due Diligence Section Is Really Telling You

The due diligence section reads like a checklist. It functions like a preview of where the buyer expects to find problems.

Common requests include three to five years of tax returns, profit and loss statements, balance sheets, customer contracts, lease agreements, equipment schedules, and employee documentation. A well-structured due diligence list is not a red flag. It is a sign the buyer is organized and serious, which from what we have seen tends to correlate with deals that actually close.

What you should watch for: vague or open-ended language. Phrases like “any other information the buyer deems relevant” give a buyer unlimited runway to request materials, delay the process, and surface post-LOI renegotiation arguments. Ask your attorney to define the scope with specificity.

Side note: this is also why getting your financial records in order before signing an LOI matters so much. If your books are clean, categorized, and reconciled, due diligence moves fast. If they are not, expect delays, lender friction, and buyers who use the disorganization to justify lowering the offer.

Reps, Warranties, and Indemnification

This is where sellers often take on more risk than they realize.

In a typical small business acquisition, the seller makes a series of statements about the business: that the financial statements are accurate, that there are no undisclosed liabilities, that all material contracts are valid. The seller also confirms authority to complete the sale.

If any of those representations turn out to be incorrect post-close, you may be on the hook for indemnification claims. Two numbers matter here. The indemnification cap (the maximum dollar amount the seller can owe for breach of reps) and the survival period (how long after close those claims can be made).

A reasonable indemnification cap on a $1.5M deal is somewhere in the range of 15% to 25% of the purchase price, with a survival period of 12 to 18 months. Caps above 50% of purchase price or survival periods beyond two years deserve pushback. Hard pushback.

The LOI will often reference these in general terms. Lock in favorable ranges before you get to the purchase agreement. Once you are in that phase, the buyer’s attorney will draft to their advantage, and you will be negotiating from a weaker position with an exclusivity clock ticking.

How Regalis-Backed Buyers Approach the LOI

When our team puts an LOI in front of a seller, every number in that document has already been run through SBA underwriting. The price reflects what a lender will actually finance. The structure reflects what a bank will actually approve. And the timeline reflects how long SBA deals actually take to close.

That means sellers are not signing an LOI based on a number that later falls apart in financing. The deal that gets papered is the deal that closes.

There is no cost to sellers in this process. No commission, no fee, no obligation. Our clients are the buyers. Sellers benefit from transacting with a buyer who is properly advised, pre-qualified, and structured for a real close.

If you want to understand what a realistic LOI might look like for your business, start the conversation here.

Reviewing a Letter of Intent as Seller: The Practical Checklist

Before you sign, work through these with your attorney. Not after. Before.

Headline price vs. net proceeds. Calculate the estimated net at close after the seller note, working capital adjustment, escrow holdback, and any closing costs. That bottom number is the real offer.
Seller note terms. Confirm standby period, interest rate, subordination terms, and what triggers repayment.
Exclusivity duration. Push for 60 to 90 days max with milestone triggers. Get a hard end date. No automatic extensions.
Related: Letter of Intent from Buyer: What to Expect
Due diligence scope. Request that the buyer define the list with specificity. Push back on open-ended language.
Earnout provisions. If present, clarify the metric, the measurement period, who controls the inputs post-close, and whether there is a cap on total earnout liability.
Indemnification cap and survival period. Negotiate the cap as a percentage of purchase price and the survival period in months. Not “as the parties agree.”
Reps and warranties scope. Ask your attorney to narrow the representations to what you can actually confirm with certainty.
Closing conditions. Review the conditions precedent to close. The fewer buyer-favorable conditions, the more protection you have if the deal stalls.

A well-negotiated LOI takes a few extra days. A poorly negotiated one takes months to unwind. If it can be unwound at all.

Frequently Asked Questions

Is the letter of intent legally binding when selling a business?

Most LOI provisions are not legally binding. The purchase price, deal structure, and general terms are typically non-binding until the purchase agreement is signed. However, exclusivity and confidentiality clauses are almost always binding. Violating an exclusivity clause can expose the seller to damages. Have an attorney confirm which provisions are binding before you sign.

How long does a seller have to respond to an LOI?

There is no legal deadline, but responding within five to ten business days is standard. Taking longer signals disorganization or disinterest, which can prompt the buyer to walk or reduce the offer. If you need time to consult an attorney or financial advisor, that is expected. Just communicate the timeline.

Can a seller negotiate the letter of intent?

Yes. And you should. The LOI is a negotiation, not a take-it-or-leave-it document. Common seller counter-points include a shorter exclusivity period, a higher purchase price or adjusted deal structure, narrower indemnification terms, and more specific due diligence scope. Most serious buyers expect a counter. A buyer who refuses all negotiation at the LOI stage is a yellow flag.

What happens after both parties sign the letter of intent?

After signing, the exclusivity period begins and the buyer moves into formal due diligence. On an SBA deal, the buyer also submits the acquisition package to the SBA lender for credit approval. This phase typically takes 30 to 60 days. During this time, the buyer’s attorney begins drafting the purchase agreement based on the LOI terms. Do not make significant changes to business operations during this period without notifying the buyer.

What is a typical exclusivity period when reviewing a letter of intent as a seller?

On SBA-financed deals, exclusivity periods typically run 60 to 90 days. This accounts for due diligence (30 to 45 days), SBA lender underwriting (two to four weeks), and purchase agreement preparation. Requests for 120 days or longer should be pushed back unless the buyer provides a clear milestone schedule and a hard termination date.

Ready to See What a Well-Structured LOI Looks Like?

Regalis Capital works with serious, pre-qualified buyers who structure LOIs around SBA-approved financing from the start. Every offer is built on deal terms that have already been underwritten, which means fewer surprises after you sign.

There is no cost to you as the seller. No commissions, no fees, no obligation.

If you are considering a sale and want to connect with a buyer who comes to the table prepared, start the conversation here.