Insights

LOI vs purchase agreement: which one actually binds you?

The LOI versus the purchase agreement is the difference between a document that binds your behavior and a document that binds your money. A letter of intent is normally non-binding on price and deal terms, and fully binding on exclusivity, confidentiality, and expenses. The purchase agreement is binding on everything, and it is the only one of the two that actually transfers the business.

Owners tend to relax when the LOI arrives and tense up when the purchase agreement shows up. That is backwards. The LOI is the moment your negotiating position is strongest and the last moment you can change the shape of the deal cheaply. By the time a draft purchase agreement lands in your inbox, most of what you would want to renegotiate has already been decided by a document you were told was not binding.

Both documents matter. They just matter at different moments, and for different reasons.

The two documents side by side

Dimension	Letter of intent (LOI)	Purchase agreement
What it is	A short written summary of price, structure, and main terms, signed before diligence	The contract that actually sells the business, signed at or before closing
What is binding	Usually only the procedural clauses: exclusivity, confidentiality, expense allocation, governing law	All of it, including price mechanics, representations, indemnity, and closing conditions
What it settles	The shape of the deal: headline price, cash at close, deferred pieces, transition expectations	The final number, who bears which risk, and what happens if a representation turns out to be wrong
Typical length	A few pages	Tens of pages plus disclosure schedules and exhibits
Who drafts it	The buyer, almost always	The buyer's counsel, almost always
Your leverage	Highest. Competing buyers still exist and you have not granted exclusivity yet	Lower. You are inside exclusivity, spending money, and the process clock is the buyer's
Cost of getting it wrong	Silent. A vague term here becomes the buyer's interpretation later	Loud, and paid in cash, escrow, or a broken deal

Length, drafting practice, and which clauses are carved out as binding all vary with the deal and the attorney holding the pen, so treat the table as the pattern rather than a rule. In plain prose, one document at a time:

A letter of intent is a short written proposal of the price and main terms a buyer wants, signed before diligence begins, whose economic terms are usually stated to be non-binding while a small set of procedural terms are stated to be binding on both parties. Its real function is to buy the buyer a period of exclusive access to you.

A purchase agreement is the definitive contract that transfers ownership of the business, setting the final price and its adjustment mechanics, the representations each side makes, and the remedies if a representation proves false. It is binding in full, and it is where every number stops being a proposal.

What a letter of intent actually commits you to

An LOI commits your time, your information, and your ability to talk to anyone else, and it does not commit the buyer to close. That asymmetry is the whole point of the document from the buyer's side, and it is not unreasonable: nobody spends real money on diligence while three competitors are still bidding.

The non-binding label on the price section is accurate as a matter of contract and misleading as a matter of practice. A buyer who signs an LOI at 5.0 times adjusted earnings is not legally required to close at that number. But that number is now the anchor for every later conversation, and every adjustment the buyer proposes gets framed as a deviation from it rather than as a fresh offer. Anchors set in an LOI are hard to move upward and easy to move down.

What the LOI does bind is usually a short list, and it is worth reading that list twice before signing. Our fuller treatment of the document lives in what is a letter of intent when selling a business.

The LOI clauses that bind you even when the LOI says it does not

Five provisions in a typical LOI survive the non-binding language, because the document explicitly carves them out. Confirm each one in your own LOI rather than assuming, since the carve-out list is set by the drafting attorney and varies deal to deal.

• Exclusivity, sometimes called the no-shop. For a stated number of days you cannot solicit, negotiate with, or in some drafts even respond to another buyer. This is the clause that converts a competitive process into a one-buyer conversation.
• Confidentiality. Usually incorporated from the NDA you already signed, and often extended to cover the existence of the LOI itself.
• Expense allocation. Who pays for what if the deal dies. The common default is that each side eats its own costs, which means your legal and accounting spend is yours whether or not you close.
• Governing law and jurisdiction. Where a fight over the binding clauses gets heard. Easy to skim past and hard to change later.
• Non-solicitation of your employees. Whether the buyer, having met your team during diligence, can hire them if the deal falls apart. Ask whether this clause is present at all, because its absence is a real exposure.

Everything else in a standard LOI, including the price, is a statement of intent. Ask your attorney to mark the binding sections in the margin before you sign, and read only those sections as though they were a contract, because they are one.

Where leverage shifts: the day you sign the LOI

Your leverage peaks the day before you sign the LOI and drops the moment you do. Before signing, you have optionality: other buyers, the ability to walk, and a market that does not yet know a deal is pending. After signing, you have one buyer, a diligence bill running, a team that is starting to sense something, and a contractual bar on picking up the phone.

That shift is why the terms you care about belong in the LOI even though the LOI is non-binding on them. A term written into the LOI is one the buyer has to argue their way out of. A term left out of the LOI is one you have to argue your way into, from a weaker position, six weeks later.

Here is the arithmetic. Take a hypothetical $6,000,000 headline price with a 120 day exclusivity period, where the buyer's actual diligence plan needs about 60 days. You have handed over roughly 60 days of pure optionality for nothing. If that buyer comes back in week 14 asking for a 5 percent price reduction, the retrade is $300,000, and your realistic choices are accept it or restart a process you have been absent from for four months. The same 5 percent, asked for in week 3 with two other buyers still live, is a conversation rather than an ultimatum. Nothing about the business changed. Only the number of alternatives did.

The Exclusivity Trade, stated as a rule: the number of exclusivity days in your LOI should match the number of days in the buyer's written diligence plan, and any extension should cost the buyer something specific, such as a larger deposit, a narrowed remaining diligence list, or a stated price floor. If a buyer cannot produce a diligence plan that justifies the window they are asking for, they are asking for option value, not for time to work. The reasons this window gets used against sellers are catalogued in why deals die after the LOI.

What the purchase agreement adds that the LOI never covered

The purchase agreement introduces the risk allocation the LOI politely ignored, and that is where the real money moves. An LOI says the price is $6,000,000. A purchase agreement says what $6,000,000 means after the working capital adjustment, what sits in escrow and for how long, what you are personally promising about the business, and what the buyer can claw back if one of those promises is wrong.

Four categories show up in the definitive document and almost never in the LOI in any real detail:

• Representations and warranties. Dozens of factual statements about your financials, contracts, employees, litigation, and compliance, each one a promise with money behind it.
• Indemnity, survival, and caps. How long each promise lives after closing, what a claim costs you, and what the ceiling is.
• Closing conditions. What has to be true on the closing date for the buyer to be obligated to fund, including consents from landlords, lenders, and customers.
• Disclosure schedules. The exhibits where you list every exception to every representation. This is the single most underestimated workload in a sale, and it is built almost entirely from your records.

Two of these mechanics deserve attention before you sign anything, because the LOI usually mentions them in one line and the purchase agreement turns that line into a formula: the working capital peg when selling a business and the escrow and holdback terms. Both are set by the documents rather than by any general rule, so the useful question is not what the number usually is. It is which months go into the calculation, who computes it, and who resolves a disagreement. Ask those three questions at the LOI stage, in writing. The full anatomy of the definitive document is in the purchase agreement when selling a business.

Negotiate it in the LOI if, leave it to the purchase agreement if

Four rules, in the order they usually apply.

• Negotiate it in the LOI if it determines how much money you receive or when you receive it. Price, cash at close, the split between cash and deferred consideration, the earnout metric and who calculates it, the working capital definition and the months used to compute it, the escrow percentage and its release schedule, the exclusivity window, and the length of your post-close involvement. These are economic terms, and economic terms only get worse after exclusivity starts.
• Leave it to the purchase agreement if it is a legal mechanic that lawyers negotiate against a known market range: survival periods, indemnity baskets and caps, materiality qualifiers, the specific wording of individual representations. Fighting these in the LOI slows you down without improving the outcome, because their fair range is well understood by counsel on both sides.
• Get it in writing before the LOI if it is a condition you would walk over. A retained asset, a building you are keeping, a family member staying employed, a customer relationship you will not let be contacted during diligence. Conditions that only surface in week 8 read as new demands rather than as terms.
• Neither document is your problem if you have only one buyer. This is the honest fourth answer, and it is more common than owners expect. Every rule above assumes a credible alternative exists. Without one, the LOI is a formality and the purchase agreement is whatever the buyer's counsel drafts, because the only leverage in a negotiation is the ability to say no and mean it. If you are looking at an unsolicited offer with no process behind it, the fix is not better drafting. It is competition. That is what a sell-side process is for, and it is the whole argument for running one on our Texas business broker page.

Reading an LOI in Plano and North Texas

North Texas owners see a particular version of this problem, because the DFW market produces a steady flow of direct approaches from private equity platforms and strategic acquirers who already operate in Plano, Frisco, and the wider Dallas metro. Those approaches usually arrive as a friendly conversation followed by a well-drafted LOI, and the document is well drafted precisely because the buyer has done this many times and you have not.

There is nothing wrong with that. It is simply asymmetric. The correction is not suspicion, it is preparation: know which clauses bind, know what your alternatives are worth, and have someone read the document who reads these documents for a living. Owners we work with on our Plano business broker page usually find that the most valuable hour in the entire deal is the one spent on the LOI, before it is signed.

The bottom line

Treat the LOI as the binding document it partly is, and treat the purchase agreement as the confirmation of decisions you already made. The economics of your sale are set in a four page document that says it is non-binding, and confirmed in a sixty page document that says it is. Owners who understand that sequence negotiate hard early and calmly late. Owners who do not tend to discover, somewhere around week 10 of exclusivity, that the argument they wanted to have is one they already conceded.

If an LOI is in front of you now, or you expect one soon, the useful move is to have it read before you sign rather than after. See how a competitive sell-side process works on our Texas business broker page, or book a confidential call. More posts like this are in the Insights library.

Last reviewed: August 2026. This is general information, not legal, tax, or accounting advice. Which provisions of a letter of intent are binding, and what a purchase agreement requires, are set by the specific documents in your transaction and vary by deal, by counterparty, and by state. Have your own attorney read your documents, and talk to your CPA about the tax consequences of any structure before you sign.