The Letter of Intent: What Buyers and Sellers Need to Know

A signed Letter of Intent can feel like a major milestone in a business transaction—and it is.

But it generally does not mean the transaction is finished.

The LOI commonly establishes a framework that allows the buyer and seller to move into detailed due diligence, financing, documentation, and final negotiations.

What Is a Letter of Intent?

A Letter of Intent, commonly called an LOI, summarizes important proposed terms of a transaction.

Depending on the deal, an LOI may address:

Purchase price

Transaction structure

Payment terms

Seller financing

Assets or ownership interests being purchased

Working capital

Inventory

Real estate

Due diligence

Financing contingencies

Transition assistance

Exclusivity

Confidentiality

Proposed closing schedule

LOIs vary considerably, and buyers and sellers should obtain appropriate legal advice regarding the document and which provisions may or may not be binding.

Why Use an LOI?

The LOI helps determine whether the parties have enough agreement to justify investing additional time and money.

Without an LOI, a buyer could spend substantial resources on due diligence only to discover that the parties never agreed on basic economic terms.

The seller also benefits by understanding how the buyer proposes to structure the transaction.

Price Is Only One Component

Two offers for the same headline price can have very different economics.

One buyer might offer substantial cash at closing. Another might rely on seller financing, contingent payments, or other conditions.

Sellers should therefore evaluate the entire structure rather than focusing exclusively on purchase price.

What Happens After Signing?

After an LOI is executed, the buyer typically begins or expands due diligence.

The buyer may investigate financial statements, taxes, customers, employees, suppliers, contracts, assets, leases, intellectual property, legal matters, and other aspects of the business.

Financing may also move forward during this period.

Meanwhile, attorneys work toward definitive transaction documents.

Due Diligence Can Change the Deal

An LOI is often based on information available before full due diligence.

If the buyer discovers material information that differs from earlier assumptions, additional negotiations may occur.

For example, changes in earnings, working capital, customer relationships, inventory, liabilities, or other matters could affect the proposed transaction.

That is one reason sellers should prepare carefully before going to market.

Exclusivity

Some LOIs include a period during which the seller agrees not to negotiate with other potential buyers.

From the buyer's perspective, this can justify investing time and money in due diligence.

From the seller's perspective, exclusivity should be carefully considered because it may temporarily limit discussions with other prospects.

The Broker's Role

A business broker can help coordinate the offer and LOI process by facilitating communication between the parties and their professional advisors.

The broker may also help clarify business terms, coordinate information requests, and maintain momentum while legal and financial professionals address their respective responsibilities.

An LOI Is a Milestone, Not the Finish Line

A signed LOI represents progress.

But significant work may remain before closing.

Buyers and sellers who understand this are better prepared for due diligence, financing, final negotiations, and documentation.

Whether you are buying, selling, or learning to become a business broker, understanding Letters of Intent is an essential transaction skill. Professional acquisition and brokerage training can help you learn how offers move from initial discussions to successful closings.