By Andreas Pettersson, Founder, Leaders ADAPT
The letter of intent is the first time a buyer writes down what they think your company is worth and how they plan to pay for it. Most owners read the price, feel a jolt, and skim the rest. The rest is where the money moves.
I sold Arcules to Canon. The lesson I took from that sale is that the headline number gets the attention and the terms around it decide what you keep, when you keep it, and how much of your life the buyer owns for the next two years. The letter is where those terms first appear. After you sign it, every one of them is harder to change.
A letter of intent to purchase a business is a short document in which a buyer sets out the price, structure, payment terms, diligence plan and timeline it proposes, mostly as nonbinding terms, plus a few binding clauses such as exclusivity and confidentiality that start working the day you sign.
Quick answer: A letter of intent to purchase a business sets out the buyer's proposed price, deal structure, payment mix, working capital peg, escrow, earnout, diligence period and your transition role. Most terms are nonbinding. Exclusivity, confidentiality, expenses and governing law usually bind. Sellers most often miss the peg, the escrow, the earnout definition and the length of exclusivity. Have a deal attorney read it before you sign.
Leaders ADAPT is not a law firm, an M&A advisor or a broker, and no firm named on this page pays us. This page is not legal advice. You need a deal attorney who closes sales your size. Our exit readiness read is a fixed fee quoted after a first call. Every deal statistic here is a third party's published number, linked with the month I read it. If their number has changed, their page wins.
Why the letter matters more than it looks
A letter of intent, often called an LOI, is short, often a few pages. It reads like a friendly summary, and buyers often present it that way. Do not read it that way.
Two things happen when you sign. First, the binding clauses start to work. Exclusivity usually means you stop talking to other buyers. That is the moment your bargaining power drops, because the buyer now knows you are not running a parallel process. Second, the letter becomes the frame for the purchase agreement. Lawyers will draft from it. A term you accepted in the letter is a term you will be asked to defend reopening later, and the buyer will call that retrading.
So the letter is where to negotiate, not the agreement. Most owners get this backwards. They save the hard questions for the lawyers and sign the letter on the price alone.
What goes in a letter of intent to purchase a business
The law firm explainers I read for this page, from Taft, Goosmann and Gordon Law, list roughly the same components. Here they are in the order I would read them as a seller.
Price and its basis. The number, and whether it is fixed or adjustable. Look for the words cash free, debt free. They mean the buyer pays the price for the business and you settle debt and keep or hand over cash at closing. That alone can move the figure that reaches you by a lot.
Structure. Asset purchase, stock purchase or merger. An asset sale lets the buyer pick which assets and liabilities it takes. A stock sale moves the whole company, history included. The tax result for you can be very different on the same price, so bring your tax advisor in before you accept a structure.
Consideration mix. How you get paid. Cash at closing, a seller note, a rollover into the buyer's company, an earnout. The headline price is the sum of all of them. Only the cash at closing is money you can count on.
Working capital peg. The normal level of working capital the buyer expects at closing. If you deliver less, the price falls. More on this below, because it is the clause I see owners miss most.
Escrow or holdback. Part of the price held back to cover claims after closing. The letter should state the amount and how long it is held.
Earnout. A share of the price paid later if the business hits targets. Our earnout page covers how to write one you can collect.
Exclusivity, or no shop. You agree not to talk to other buyers for a period. Goosmann notes it can also include a duty to tell the buyer about competing approaches.
Due diligence. What the buyer will review and how long it has. Gordon Law lists access to records and employees as a typical binding item.
Employment and transition. What the buyer expects of you after closing, and often which managers it wants to keep.
Confidentiality, expenses, governing law and termination. Who keeps what secret, who pays which costs if the deal dies, which state's law applies, and when the letter ends. Goosmann suggests thinking about an outer limit of 60 to 90 days past the proposed closing date after which either side can walk away.
What is binding and what is not
Most of the letter is an agreement to agree. A few clauses are real contracts the day you sign. Which ones is negotiable, and your attorney decides the drafting. The table shows the typical split according to the three law firm explainers above.
| Term | Typically binding | What to watch as a seller |
|---|---|---|
| Price and structure | No | Cash free, debt free wording, asset vs stock, the tax result |
| Consideration mix | No | How much is cash at closing vs later |
| Working capital peg | No | The method and the months it is based on |
| Escrow and holdback | No | Amount, length, and what claims it covers |
| Earnout | No | Metric, period, who controls the results |
| Employment and transition | No | Length, role, and whether it is a closing condition |
| Exclusivity or no shop | Yes | Length, end date, and a way out if the buyer stalls |
| Confidentiality | Yes | Covers the buyer's advisors and lenders too |
| Expenses | Yes | Who pays what if the deal dies |
| Governing law | Yes | Which state's courts and rules apply |
| Access for diligence | Often | Who the buyer may talk to inside the company, and when |
Two warnings about the word nonbinding.
First, binding clauses get enforced. A Harvard Law School Forum post by Kirkland and Ellis partners describes a Delaware court granting injunctive relief on colorable claims that a party breached the exclusivity and confidentiality terms of a letter and failed to negotiate in good faith. The court said that radio silence is not negotiating in good faith. If you sign a binding exclusivity clause, assume you will be held to it.
Second, casual language carries weight. The same post warns that phrases like negotiate in good faith can create obligations the parties did not expect. The fix is a letter that states plainly which clauses bind and which do not. Goosmann notes a nonbinding letter can say outright that the parties do not intend any of its provisions to be legally binding, apart from the ones listed.
The clauses sellers miss
Owners do not miss these because they are careless. They miss them because the price is on page one and these are on page two.
The working capital peg. SRS Acquiom reports in its working capital adjustment study that these adjustments are now present in more than 90 percent of the private deals it studies, up from 50 percent about a decade earlier. If the letter only says a normal level of working capital, the number gets set later, by the buyer's accountants, during exclusivity, when you have the least bargaining power. Ask for the method, or at least the trailing months it will use, in the letter itself.
The escrow. In Fasken's summary of the SRS Acquiom 2026 study, published on Mondaq, the median escrow across all deals was 10 percent of deal value in 2025, and 2.8 percent on deals with representations and warranties insurance. The same summary puts insurance on about 46 percent of deals. If the letter is silent on escrow, the number will be set in the agreement, and 10 percent of your price arriving later, if no claims are made, is a different life plan from 10 percent today.
The earnout definition. The same summary reports earnouts in 24 percent of 2025 deals, with median earnout potential at 34 percent of the closing payment. The most common length was one to two years. An earnout written as a revenue target is not the same as one written as an EBITDA target after the buyer's own overhead is allocated. Get the metric, the period and the accounting rules written into the letter, or at least agree they will be.
The length of exclusivity. Taft says the period should be long enough to finish diligence but not so long that it disadvantages the seller. None of the explainers I read gives a standard number, so I will not invent one. Ask the buyer for its diligence plan, set the period to fit it, and add a right to end exclusivity if the buyer misses its own milestones.
Cash free, debt free. If you do not know what counts as debt, you do not know your price. Some buyers include deferred revenue, unpaid bonuses or customer deposits. Ask.
Your role after closing. A transition period, a consulting agreement or a full employment contract. The length matters, and so does whether it is a closing condition. That is the clause that tells you how much of the next two years the buyer thinks it owns.
The people. Some letters name managers the buyer wants retained and make their signed agreements a condition of closing. If one of them says no, the deal can stall at the worst moment.
Our page on the cost to sell a business shows how the escrow, the peg and the earnout turn into the gap between the headline and what lands in your account.
How founder dependency shows up in the terms
Here is the part most owners do not see coming. The letter does not say that the company depends on you. It prices it.
A buyer who believes the business runs through the owner protects itself in four places. A longer required transition, sometimes with you as an employee rather than a consultant. A bigger earnout, so part of the price depends on results after you hand over control. A larger escrow, to cover what it might find. And retention conditions for the two or three people who actually know how things work.
The owners I talk to often grew the company by grind, tried a general manager once, watched it fail, and decided to sell rather than try again. I understand that. The trap is that the missing second in command is exactly what the buyer is pricing. Each of those four terms is worth more than any fee you will negotiate.
What buyers test is set out on what buyers look for in a management team, and the risk itself on key person risk. The fix is a team that runs a week without you, and it is the work our leadership team development guide covers. It takes longer than a diligence period. Start before the letter arrives.
Where AI fits in reading a letter of intent
AI is useful here, within limits.
It can compare. Paste two letters from two buyers into an assistant and ask for a side by side of price, cash at closing, escrow, peg, earnout terms and exclusivity length. You will see in ten minutes what the cover emails tried to blur.
It can prepare. A buyer's diligence list arrives the week you sign. An assistant pointed at your own files can pull revenue by customer, list contracts with change of control clauses and flag gaps before the buyer's team does. For companies on EOS, our guide to AI for EOS companies shows where that work fits the quarterly rhythm.
It cannot judge. It does not know your state's law, your tax position or what you will accept. It will also sound confident about both. Our page on what not to delegate to AI makes the longer case. Use AI to read faster. Use your deal attorney to read correctly, and decide yourself.
What a good letter of intent does not fix
A well negotiated letter protects the terms. It does not change the company the buyer is about to examine.
A good letter does not fix numbers a stranger cannot verify. If the books close late or the add backs live in your head, the buyer's accountants will find it during exclusivity, and the price talk reopens with you unable to walk away. A sell side quality of earnings report, done early, is the usual answer.
A good letter does not fix dependence on you. The earnout and transition terms are the buyer's response to it, and no clause makes the risk disappear.
A good letter does not replace a deal attorney or the right agent. If you are deciding who runs the process, our business broker vs M&A advisor comparison is the place to start.
And it does not fix timing. The exit readiness checklist lists what a buyer will test, and prepare business for sale turns it into a plan you can run 12 to 24 months ahead.
Who is on the bench for this
Steve Shaw is the fractional CFO on the Leaders ADAPT bench. Steve has twenty years in finance leadership and works with owners on clean books, cash discipline, financial positioning before a sale, and the numbers conversation with buyers and lenders. The working capital history behind a peg, the add back file and the debt definition are his ground. He is the one who tells you what the price in the letter means in cash.
Thor Legvold is the leadership psychologist on the bench. He works on assessments, executive fit, team dynamics and the people decisions behind a sale. When a letter names managers to retain, Thor helps you see whether those people can carry the company without you, before the buyer finds out.
Neither of them replaces your deal attorney. Every engagement runs through Leaders ADAPT. I take the first call, match the partner, and stay in the room.
Letter of intent to purchase a business FAQ
What is a letter of intent to purchase a business?
It is a short document in which a buyer sets out the main terms on which it proposes to buy your company, such as price, structure, payment, diligence and timing. Most of it is not binding. A few clauses usually are, often exclusivity, confidentiality, expenses and governing law. It is the outline the purchase agreement will be written from.
Is a letter of intent to buy a business legally binding?
Usually only in part. Law firm guidance from Taft, Goosmann and Gordon Law describes the price and deal terms as typically nonbinding, while confidentiality, exclusivity and expenses are typically binding. Courts can enforce those binding parts, including good faith negotiation language. The letter should say plainly which clauses bind. Your deal attorney decides how that is drafted for your state.
How long is the exclusivity period in a business purchase LOI?
There is no standard length, and none of the law firm explainers I read gives one. Taft says the period should be long enough to finish diligence but not so long that it disadvantages the seller. Push for the shortest period that fits a realistic diligence plan, with an end date, and a way out if the buyer misses its own milestones.
What is a working capital peg in a letter of intent?
It is the normal level of working capital the buyer expects the company to deliver at closing. If you deliver less, the price drops. SRS Acquiom reports working capital adjustments in more than 90 percent of the private deals it studies. Get the peg method, or at least the months it will be based on, written into the letter.
Should a seller accept an earnout in the letter of intent?
Only if you can describe exactly how it is measured and who controls the results. Fasken's summary of the SRS Acquiom 2026 study reports earnouts in 24 percent of 2025 deals, with median earnout potential at 34 percent of the closing payment. That is a large share of the price paid later. Define the metric, the period and your role in the letter.
What clauses do sellers most often miss in a letter of intent?
The working capital peg, the escrow size and how long it is held, the exact definition of any earnout, the length of exclusivity, what happens to your role and your key people, and whether the price assumes cash free and debt free. Each one looks small on page two. Each one can move the money you keep more than a small change in the headline price.
Do I need a lawyer to review a letter of intent?
Yes. Have a deal attorney who closes sales of your size read it before you sign, not after. The letter sets the frame for the purchase agreement, and terms you accept here are hard to reopen later. Leaders ADAPT is not a law firm or an M&A advisor. This page is not legal advice, and your attorney's view wins.
How does founder dependency show up in a letter of intent?
Through the terms around you. A longer required transition period, a bigger earnout, a larger escrow, retention conditions for key staff, or an employment agreement as a closing condition. Each is the buyer pricing the risk that the company stops working when you leave. A team that runs without you shortens that list before the letter is drafted.
Read the terms before you fall for the number
Here is a step for tomorrow morning, whether or not a letter is on your desk. Write down the price you want. Under it, write the five terms you now know to ask about: cash at closing, escrow, peg method, earnout definition, and your role after closing. Next to each, write what you would accept. If you cannot fill in the last two, the company still runs through you, and a buyer will write that into the terms.
Being excited about an offer is normal. Signing exclusivity because of it is the mistake. The time to strengthen your position is before the letter, not during it.
What the first conversation looks like
It is a 30 minute call with me, not a sales rep. Bring the letter if you have one, or the price you have in mind if you do not. I will tell you which terms I think the buyer will push on, which of them reflect risk you can still reduce, and whether an exit readiness read is the right next step. If the honest answer is that you need a deal attorney this week, I say so and stop there.
If we go ahead, the read is a fixed fee quoted after that call. Steve takes the numbers, Thor takes the people, I take the whole, and you get a written view of what a buyer will find and what to fix first.
Your step for tomorrow morning: take the free assessments so I can see how much of the company runs through you, then read the exit readiness page. Find out whether you are ready for the exit you are now excited about, before you sign away your bargaining power.
