What to Look for in an LOI Before You Sign

Most sellers treat the letter of intent like a formality. A handshake on paper. Something the buyer’s attorney drafted and the seller’s attorney will review before the real negotiation begins.

That framing will cost you.

The LOI is where deal terms get set. By the time you reach the purchase agreement, most of what matters has already been agreed to in principle. Knowing what to look for in an LOI before you sign is one of the most important things you can do to protect yourself in a business sale. And yet, we see sellers gloss over it constantly.

Purchase Price: Structure Matters More Than the Number

The headline number in an LOI is the starting point. Not the finish line.

A buyer might offer $1.5M for your business. Sounds good on paper. But if $300K of that is an earnout tied to post-close revenue targets you no longer control, the real offer is $1.2M with a conditional $300K bonus you may never see. That distinction matters enormously, and it is the kind of thing that gets buried in clean formatting and round numbers.

Look at how the purchase price breaks down:

How much is paid at close from the SBA loan and buyer equity
How much is a seller note, and on what terms
Whether any portion is contingent on future performance (an earnout)
Whether working capital is included in the price or handled separately

On SBA-financed deals, a standard structure looks like this: 70% to 80% SBA loan, 10% buyer equity injection, and a seller note covering the remaining 10% to 20%. That seller note will almost certainly be on full standby for up to 10 years with 0% interest. We see this on roughly 90% of the deals we work on. It is not a red flag. It is a condition of the SBA loan itself, and pushing back hard on it usually signals a seller who has not been through this process before.

What you should push back on is any earnout that exceeds 10% to 15% of the total purchase price, especially if the performance metrics are tied to revenues or margins the new owner controls after you leave.

What an LOI Actually Is (And What It Is Not)

A letter of intent is a non-binding agreement that outlines the proposed terms of a business acquisition. It covers the purchase price, deal structure, financing contingencies, exclusivity period, and key conditions before the parties commit to a full purchase agreement.

Non-binding does not mean meaningless. Once you sign an LOI, you are handing the buyer exclusivity, typically for 30 to 90 days. You cannot entertain other offers during that window. If the deal falls apart, you start over, having lost months and potentially having disclosed sensitive financial information to someone who walked away.

The LOI is also where buyers anchor terms. Every negotiation that follows uses the LOI as the baseline. If you accepted a vague or unfavorable purchase price calculation, you will fight that battle again in the purchase agreement. From a weaker position.

Read it carefully. Push back where it counts.

Valuation Basis: How Did the Buyer Calculate That Number?

An LOI should specify how the buyer arrived at the purchase price. If it does not, ask.

You want to know whether the offer is based on EBITDA, SDE, or revenue, and what multiple was applied. Most small business acquisitions in the $500K to $5M range use SDE as the basis. Buyers typically pay 2.0x to 3.0x SDE for businesses in this range, depending on the industry, revenue concentration, and how much the business depends on the owner to operate.

Here is where it gets practical. If an LOI offers 4.0x SDE on a $300K SDE business, that is a $1.2M offer. High end of market. The buyer’s lender will scrutinize that number hard during underwriting, and you should expect it to come under pressure in due diligence. If an LOI offers 1.8x SDE, that is a starting point worth countering, assuming your financials are clean and the business is not heavily owner-dependent.

The point is not to memorize every multiple by industry. The point is to know what the offer is based on so you can evaluate it fairly and push back with actual numbers instead of gut feelings.

Side note: SDE itself is worth questioning. We routinely see SDE figures that have been adjusted to look more favorable than the real cash flow supports. If the tax returns and the bank statements do not tell the same story as the SDE presented in the listing, the valuation built on top of it is unreliable. Proof of cash is the gold standard.

The Exclusivity Clause: How Long Are You Locked Out?

This is one of the most seller-unfriendly terms in a standard LOI. And one of the most overlooked.

When you sign, you agree to stop marketing the business and stop talking to other buyers for a defined period, typically 30 to 90 days. During that window, the buyer conducts due diligence. If something comes up, or if the buyer simply walks, you have to restart the entire process.

Look for three things:

Length. Thirty days is reasonable. Sixty is acceptable if the deal is complex. Ninety days is a long time to be off the market. Push for 45 to 60 days as the default, with an extension option only if both parties agree.

Termination rights. You should be able to exit the LOI if the buyer goes dark for a defined period, say 10 business days without meaningful due diligence activity. This prevents a buyer from tying up your business while they decide whether they actually want to proceed.

Material change provisions. If the buyer tries to retrade the price after due diligence, you want the right to terminate without penalty. A good LOI spells out what constitutes a material change that allows either party to walk.

That last one matters more than most sellers realize. We have seen buyers use the exclusivity window to negotiate aggressively on price, knowing the seller has already pulled the listing and has no other options. A clear termination trigger protects you from that.

The Financing Contingency: Is This Deal Actually Fundable?

The LOI should specify how the buyer intends to finance the acquisition. “Subject to financing” is not good enough. You want specifics.

If the buyer is using SBA 7(a) financing, the LOI should say so. Ideally, the buyer has already received a pre-qualification letter from an SBA-approved lender. This is not a guarantee of funding, but it tells you the buyer’s financial profile has been reviewed and the lender believes the deal is worth pursuing.

What you do not want: a buyer who lists “conventional bank loan” or “investor capital” as the financing source without any evidence that either is in place. Those deals close at a much lower rate than SBA-financed deals because the financing is not standardized or pre-structured.

SBA financing comes with its own timeline. Budget 60 to 90 days from signed LOI to close. That includes underwriting, appraisals, and final document preparation. If a buyer promises to close in 30 days on SBA financing, they either do not understand the process or are not actually using SBA. Either way, a red flag.

So that covers price, exclusivity, and financing. But there is a section most sellers skip entirely.

Representations, Indemnification, and the Survival Period

Most sellers jump straight to the purchase price and blow past the reps and warranties section.

That is a mistake.

The LOI will often outline the general framework for seller representations (what you are promising is true about the business) and indemnification (what happens if something you represented turns out to be false).

Look for the indemnification cap. This is the maximum dollar amount the seller is on the hook for if a rep turns out to be wrong. A reasonable cap is 10% to 20% of the purchase price. A cap at 100% of the purchase price means you are taking on significant post-close liability.

Also look at the survival period, the length of time the buyer can come back and make an indemnification claim. Eighteen to 24 months is standard. Five years is aggressive.

If the LOI does not address these terms at all, make sure your attorney includes reasonable caps and survival periods when drafting the purchase agreement. It is easier to set these boundaries before you are deep into the purchase agreement stage than after, when the pressure to close makes everything harder to renegotiate.

Due Diligence Scope: What Are They Actually Asking For?

Some LOIs include a schedule of due diligence items the buyer intends to review. Pay attention to this.

A reasonable due diligence request covers financial records (three years of tax returns, P&Ls, and balance sheets), customer contracts, lease agreements, employee records, equipment lists, and key vendor relationships. Standard stuff.

Be cautious if the buyer asks for customer-level revenue detail, proprietary operational processes, or supplier pricing before signing a solid non-disclosure agreement. Your LOI should reference an NDA that was executed before any sensitive information was shared.

Also look at the due diligence timeline. A buyer asking for 60 days of due diligence on a $1.2M HVAC company is asking for more time than the deal requires. Thirty to 45 days is typical for businesses in this size range. A long due diligence window combined with a long exclusivity period is how an unprepared buyer ties up your business indefinitely.

Buyers backed by experienced advisors come to due diligence with a clear checklist and move quickly. That is one reason sellers who work with well-advised acquisition teams tend to have smoother processes, fewer surprises, and higher close rates.

What a Well-Structured LOI Looks Like

A fair, well-drafted LOI for a small business sale in the $500K to $5M range should clearly address:

Total purchase price with a specific breakdown (SBA loan portion, equity, seller note)
Valuation basis, whether SDE or EBITDA multiple, with the specific multiple stated
Any earnout terms with defined metrics and a cap on contingent consideration
Exclusivity period of 45 to 60 days with termination rights for both parties
Financing source with evidence of pre-qualification if SBA
Due diligence scope and timeline, 30 to 45 days is typical
A general framework for reps, warranties, and indemnification caps
Working capital treatment, included in price or handled as a separate adjustment at close

If any of these are missing or vague, push for clarity before you sign. Ambiguity in the LOI becomes a dispute in the purchase agreement. Every time.

Frequently Asked Questions

What is the purpose of a letter of intent when selling a business?

A letter of intent establishes the proposed terms of a business sale before the parties invest in full due diligence and legal document preparation. It covers purchase price, deal structure, financing, and exclusivity. While the LOI is typically non-binding, it sets the baseline for every negotiation that follows, making it one of the most important documents in the sale process.

Can a seller negotiate the terms of an LOI?

Yes, and sellers should. The LOI is a proposal, not a final agreement. Sellers commonly negotiate the purchase price, exclusivity period, earnout terms, due diligence timeline, and indemnification framework. Accepting an LOI without pushback is a common mistake. Once signed, the LOI anchors the deal and reduces your leverage going forward.

What happens if a buyer retrads the price after the LOI is signed?

Retrading means the buyer lowers the purchase price after due diligence, citing something they found in the process. It is more common than sellers expect. A well-drafted LOI limits this by defining what constitutes a material adverse change that justifies a price adjustment. If the buyer retrads without a legitimate basis, you can walk away and relist, though you will have lost the exclusivity period.

How long does it take to go from a signed LOI to close?

On SBA-financed deals, the typical timeline is 60 to 90 days from signed LOI to close. This includes 30 to 45 days of due diligence, 2 to 4 weeks of SBA lender underwriting, and final document preparation. Disorganized financials, title issues, or lender requests for additional documentation can extend this. Plan for a minimum of 60 days after LOI before you can expect to close.

What is a seller note, and is it standard in an LOI?

A seller note is a portion of the purchase price paid to the seller over time rather than at closing. On SBA deals, a seller note covering 10% to 20% of the purchase price is standard. The SBA typically requires this note to be on full standby (no payments) for up to 10 years at 0% interest. Sellers should expect this on any SBA-financed deal. It is a condition of the financing, not a negotiating tactic.

Thinking About Selling Your Business?

Regalis Capital works exclusively on the buy side, representing serious, pre-qualified buyers who use SBA 7(a) financing to acquire businesses in the $500K to $5M range. As a seller, you pay nothing. No commissions, no fees, no obligations.

When you work with a Regalis-backed buyer, the LOI they bring to the table reflects a deal that has already been structured for SBA financing. That means fewer surprises in due diligence, a cleaner process, and a higher probability of closing.

If you want to connect with a well-funded, properly advised buyer, start the conversation here.