What Is a Letter of Intent in a Business Sale?

TL;DR: A letter of intent (LOI) sets the price and structure of a business sale, but most of that is not actually binding. The parts that are binding, especially the exclusivity clause, are usually the ones sellers read the fastest. Read those provisions first, confirm what's enforceable and what isn't, and get the document reviewed before you sign anything.

The first time a seller sees a letter of intent, it can look like the deal is basically done. There's a price, a structure, sometimes a closing date. It's easy to treat the document as a formality and sign it the same day it arrives. That assumption is exactly what gets first-time sellers into trouble, and it's a mistake our Mergers and Acquisitions attorneys see often enough that we walk every client through the same short list of provisions before they sign.

What an LOI Actually Is

A letter of intent is a preliminary document that lays out the terms two parties expect a deal to follow: purchase price, deal structure, timeline, and the general shape of what's ahead. It's meant to get everyone rowing in the same direction before the real work of due diligence and drafting begins.

What it isn't, in most cases, is a contract to sell the business. The commercial terms, the numbers a seller tends to focus on, are typically non-binding. They can be revised or withdrawn before closing or before a formal purchase agreement is signed. That gap between how final an LOI looks and how final it actually is causes most of the confusion we see.

Binding vs. Non-Binding Terms: The Part Most Sellers Miss

"Sellers often assume that because the price and terms are spelled out, the deal is essentially done, when in reality, most of those business terms are non-binding and can be revised or withdrawn before closing or before the formal sale agreement is signed," says Jon Thielen, Esq., Partner at Company Counsel LLC. "The parts that actually bind you, confidentiality, exclusivity, governing law, are usually the ones that get the least attention."

Think of the non-binding terms as the parties' shared understanding of the deal they're working toward, and the binding terms as the rules for how they'll behave while getting there. Only the binding half can actually be enforced against you if you change your mind, which is exactly why those clauses deserve the closest read, not the price line.

Exclusivity and Timing: The Clause That Can Cost You Leverage

The exclusivity provision, often called a "no-shop" clause, is where sellers get burned most often. It typically locks a seller into a 60 or 90 day window where they can't field other offers. Signed as a formality, it can feel harmless. It stops feeling harmless the moment the deal slows down.

We worked with a seller who signed an LOI without having an attorney review it first, assuming it was routine paperwork. Weeks later, the exclusivity period had locked them out of talking to other buyers, and by the time they came to us, the original buyer had leverage to renegotiate price downward. The seller had no real alternative offer on the table to push back with. "If the deal stalls or the buyer starts negotiating terms, the seller has little leverage without the ability to talk to other potential buyers during this time," Thielen says.

Before signing, read the exclusivity and termination provisions first. Those two sections govern what you can and can't do while the deal is pending, and how easily either side can walk away. Vulnerabilities like this are part of a broader pattern of legal issues that quietly reduce what a business is worth at sale time, and exclusivity terms belong on that same watch list.

Common Traps First-Time Sellers Fall Into

The recurring trap isn't a hidden clause buried in fine print. It's the assumption that an LOI is either fully binding or fully meaningless, when it's actually both at once, non-binding on price and structure, binding on confidentiality, exclusivity, and governing law. Sellers who treat the whole document as a formality miss the parts that can actually be enforced against them.

The fix is simple to describe and easy to skip under deal pressure: if the LOI doesn't clearly state which sections are binding versus non-binding, that ambiguity needs to be resolved before signing, not after.

When a Bare-Bones LOI Is Actually Fine

Not every deal needs a heavily negotiated term sheet. When the buyer is known and trusted, the deal is straightforward, and the seller wants to move quickly into due diligence, a short LOI that specifies price, structure, and a reasonable, short exclusivity window can serve the seller better than a longer document that invites over-negotiation before anyone knows whether the deal will work.

Getting It Reviewed Before You Sign

An LOI is where a business sale starts to take real shape, and it's also where a seller's leverage is at its highest. Once it's signed, especially once an exclusivity clause is running, that leverage starts to shift toward the buyer. Having the document reviewed before signing, not after a deal stalls, is what keeps that leverage where it belongs.

Key Takeaways

• Most of an LOI's commercial terms, price and structure included, are non-binding and can change before closing.
• Confidentiality, exclusivity, and governing law provisions are usually binding, and usually the least-read part of the document.
• A 60 to 90 day exclusivity clause can strip your leverage to negotiate elsewhere if the deal slows down.
• If an LOI doesn't state which sections are binding, resolve that ambiguity before you sign, not after.
• A short, bare-bones LOI can be the right call with a known, trusted buyer and a straightforward deal.

If you've received a letter of intent, or you're about to send one, have it reviewed before you sign. Our Mergers and Acquisitions attorneys can walk through the binding and non-binding provisions with you and flag anything that needs to change before it becomes a problem. Schedule a consultation with Company Counsel to get a second set of eyes on your LOI.

About the author: Jon Thielen, Esq. is a Partner at Company Counsel LLC, where his practice focuses on transactional and employment law matters, including corporate structuring, business acquisitions, and commercial litigation.