Insights

What a letter of intent really means when you sell your business

A buyer hands you a letter of intent with a number that makes you sit up straight, and it feels like the deal is done. It is not. The letter of intent is closer to the starting gun than the finish line, and the moment you sign it, the balance of power in your sale quietly shifts toward the buyer. Most owners do not learn that until they are months into a process they can no longer control.

What a letter of intent actually is

A letter of intent, almost always shortened to LOI, is a short document a buyer sends to lay out the proposed shape of a deal before anyone spends real money on lawyers and diligence. It names the price, roughly how that price gets paid, and the major conditions. Think of it as the buyer saying, here is the deal I am willing to pursue, in writing, so we both stop guessing.

It is not the contract that actually sells your company. That comes later, in the definitive purchase agreement, after due diligence. The LOI is the framework everyone agrees to negotiate inside. Getting the framework right matters, because almost nothing in the final deal will be better for you than what the LOI sets up.

What binds you and what does not

This is the part owners get backwards. The exciting parts of an LOI, the price and the terms, are usually non-binding. Either side can still walk away or push for different numbers before the purchase agreement is signed. The number on the page is a serious proposal, not a guarantee.

But a few clauses in an LOI usually are binding, and they are the ones owners skim past:

• Exclusivity, or the no-shop. You agree not to talk to any other buyer for a set period. This is the big one, and we will come back to it.
• Confidentiality. Both sides agree to keep the talks and the shared information private.
• Expenses. Usually each side pays its own costs, but read it, because some buyers try to shift fees.

So the strange truth is that the parts you care about most are non-binding, and the parts you might ignore are the ones that actually lock you in.

The terms that matter more than the price

The headline number is what every owner looks at first, and it is the least complete part of the story. Two LOIs with the same price can be worth very different amounts to you once you read past the top line. A few terms quietly decide what you actually walk away with:

• How much is cash at closing. A high price paid partly through an earnout or a seller note is not the same as cash in hand. Ask what hits your account on day one.
• Earnouts and seller notes. If part of the price depends on future performance or gets paid over time, that is money you might not see. Know exactly how it is measured and when it pays.
• Working capital. The LOI should signal how working capital is handled. Get this wrong and cash you assumed was yours can be swept into the deal at closing.
• Escrow or holdback. Buyers often hold back a slice of the price for a year or more against problems. The size and length are negotiable, and they are easier to push on now than later.
• Asset versus stock sale. The structure named in the LOI drives your after-tax result. It is far cheaper to negotiate before you sign than after.

The price tells you what the deal looks like. These terms tell you what it feels like when the money actually moves.

Why your leverage peaks the day you sign

Here is the part that costs owners the most. Before you sign an LOI, you have options. You can talk to other buyers, you can walk, you can let competition push the price up. The buyer knows it, and that is exactly why their offer is strong.

The moment you sign, exclusivity kicks in. For the next 60 to 90 days, often longer, you are committed to one buyer and no one else. Your competition is gone. Now the buyer runs due diligence, and if they find something, or simply decide to test you, they can come back and lower the price. That move has a name, the retrade, and it works because you no longer have anywhere else to go. The leverage you had the day before you signed does not slowly fade. It disappears the instant the ink dries.

This is why a real sell-side process is worth so much more than fielding one offer. When several buyers want the business, you sign the LOI from a position of strength, and exclusivity costs you far less because you chose the best option rather than the only one. You can see how that process works on the Texas business broker page, and what it looks like in a specific market on the Dallas page.

How to protect yourself before you sign

You do not need to be a dealmaker to avoid the worst mistakes. You need to slow down at exactly the moment it feels safe to speed up. A few things make the biggest difference:

• Negotiate the LOI like it is the final deal. It mostly is. The terms you accept here set the ceiling for everything that follows.
• Keep the exclusivity period short and defined. Aim for 60 to 90 days, with extensions only by mutual agreement, not automatic.
• Pin down cash at closing. Separate the headline price from what actually lands in your account on day one.
• Have your financials clean first. The cleaner your numbers going in, the less room a buyer has to retrade you later. A sell-side quality of earnings review pays for itself here.
• Do not sign with one buyer if you can have several. Competition before the LOI is the cheapest leverage you will ever get.

The bottom line

A letter of intent is a good sign. It means a buyer is serious enough to put real terms in writing. But it is the beginning of the hardest part of the sale, not the end, and it is the last moment you hold most of the cards. Owners who treat the LOI like a celebration tend to give ground for the rest of the deal. Owners who treat it like the most important negotiation of the process tend to keep what they were promised.

If a buyer has approached you, or you can see a sale coming in the next year or two, the time to understand the LOI is before one lands on your desk. You can read how this fits the full process on the Texas business broker page, browse the Insights library, or just tell me where you are and I will give you a straight read.

This article is general information, not legal, tax, or accounting advice. The binding effect of any letter of intent depends on its exact wording and your situation. Have your attorney and CPA review any LOI before you sign it.

Frequently asked questions

Is a letter of intent binding when selling a business?

Mostly no, but partly yes. The price and deal terms in a letter of intent are almost always non-binding, which means either side can still walk or renegotiate before the final purchase agreement. But a few clauses usually are binding, and they matter: exclusivity (also called a no-shop), confidentiality, and who pays expenses. So the number is a placeholder, but the moment you sign, you are often locked into dealing with that one buyer for a set period.

How long is the exclusivity period in an LOI?

Most exclusivity, or no-shop, periods run from 60 to 90 days, sometimes longer for complex deals. During that window you agree not to talk to or negotiate with other buyers while the buyer completes due diligence. A shorter period and a clear path to extend it only by mutual agreement protects you. An open-ended exclusivity period takes away your only real source of pressure.

Can the price change after the letter of intent is signed?

Yes. Because the price is usually non-binding, a buyer can revise it during due diligence if their findings differ from what they expected, a tactic sometimes called a retrade. Clean financials, a sell-side quality of earnings report, and full disclosure up front are the best defense, because they remove the surprises a buyer would otherwise use to justify lowering the number.

Should I sign an LOI from the first buyer who makes an offer?

Be careful. Signing an LOI with one buyer usually means agreeing to exclusivity, which ends any competition you had. The strongest position is to run a process that creates more than one interested buyer, then sign with the best of them. One offer in isolation is rarely the best offer, and once you sign, your leverage to improve it drops sharply.