What is Letter of Intent?

What it is

A Letter of Intent (LOI) is the early acquisition document that outlines price, structure, diligence rights, exclusivity, closing conditions, and timing before the definitive APA is drafted. Most economics are framed as non-binding, but confidentiality, exclusivity, expense allocation, and sometimes break-up fees are binding.

Why it matters in your deal

For a self-funded ETA searcher, the LOI is the leverage point before the seller is off-market and before the buyer has full diligence access. A tight LOI preserves room to retrade after QoE, customer concentration, lease, financing, or consent issues surface. A seller-favorable LOI can quietly lock the buyer into price, timing, and exclusivity before the real risk is known.

Real example

A self-funded searcher acquiring a $4M HVAC business signs an LOI with 75 days of exclusivity to complete QoE, customer concentration review, and SBA financing diligence. If QoE shows EBITDA is $150K lower than seller-adjusted earnings, the buyer can retrade only if the LOI kept price subject to confirmatory diligence and did not convert the pricing language into a binding commitment.

Red flags to watch

• •Purchase price stated as fixed rather than subject to QoE, working capital, financing, and confirmatory diligence
• •Exclusivity longer than 90 days without milestone extensions or shorter than 45 days for a diligence-heavy deal
• •Financing structure locked before SBA underwriting, seller-note negotiation, or equity commitments are final
• •Break-up fee, deposit forfeiture, or expense reimbursement triggered by buyer termination without a fraud or misrepresentation carveout
• •Confidentiality language that blocks disclosure to counsel, lenders, QoE providers, accountants, or investor-advisers

What to do

1. 1Separate binding and non-binding provisions in the LOI header and again in the operative language.
2. 2Keep purchase price subject to QoE, working capital, customer concentration, legal diligence, financing, and final APA negotiation.
3. 3Include an express financing contingency that covers SBA underwriting, seller note terms, and lender-required collateral or guaranty conditions.
4. 4Set exclusivity to a diligence-realistic period, usually 60 to 90 days, with extension rights tied to seller delays.
5. 5Have M&A counsel review the LOI before signature, because binding process clauses survive even if the acquisition dies.

Sources

1. ABA Model Asset Purchase Agreement with Commentary
2. Delaware courts - preliminary agreement and term-sheet analysis
3. SBA SOP 50 10 - Lender and Development Company Loan Programs