Letter of Intent for Business Acquisition: Guide, Template & Key Terms

What Is a Letter of Intent (LOI) and Why It Matters

A letter of intent in a business acquisition is a non-binding summary of the key deal terms agreed to by buyer and seller before the formal purchase agreement is drafted. The LOI is typically 3–8 pages and covers the purchase price, deal structure, financing plan, exclusivity period, due diligence timeline, and principal representations and warranties expectations.

Most LOIs are explicitly non-binding on the economic terms — meaning neither party is legally obligated to close the transaction on the terms described. Despite this, the LOI is functionally the deal. Once both parties have signed an LOI, the psychological commitment to the transaction is high, the exclusivity period locks out competing buyers, and the purchase price and structure described in the LOI almost always anchor the final closing terms.

Why the LOI matters more than most buyers and sellers realize:

First, price reductions after LOI are common but psychologically costly. Due diligence often reveals issues — financial restatements, undisclosed liabilities, customer concentration, regulatory exposure — that give buyers legitimate grounds to renegotiate price. But price reductions after LOI feel like bad faith to sellers, even when they are contractually permitted. The gap between what the LOI says and what the final deal closes at is frequently 5–15%.

Second, deal structure in the LOI determines tax treatment. An asset sale versus a stock sale has material tax implications for both buyer and seller. If the LOI specifies asset sale terms, shifting to a stock sale post-LOI requires renegotiating economic terms because the tax consequences change the effective price to both parties.

Third, exclusivity in the LOI is binding — and has real value. A 60–90 day exclusivity provision in the LOI legally prevents the seller from negotiating with or accepting offers from other buyers. For sellers, exclusivity is the most consequential binding provision in an otherwise non-binding document.

LOI Structure: The Key Sections Explained

A complete business acquisition LOI covers the following sections. Each section has negotiating implications that vary by deal type.

Purchase Price and Consideration. The most important section. Specifies the total purchase price, how it will be paid (cash at close, earnout, seller note, equity rollover), and what enterprise value adjustments apply (working capital adjustment, debt-free/cash-free basis, net asset value floors). The consideration section should specify the dollar amount, not just a multiple, to avoid disputes if EBITDA is later restated.

Deal Structure: Asset Sale vs. Stock Sale. An asset sale means the buyer purchases specified assets and assumes specified liabilities — leaving residual liabilities with the seller. A stock sale means the buyer purchases the equity of the legal entity, acquiring all assets and liabilities. Sellers generally prefer stock sales (lower capital gains tax rates on equity proceeds). Buyers generally prefer asset sales (stepped-up asset basis for depreciation, no assumed hidden liabilities). The deal structure determines tax basis, liability exposure, and which contracts require consent to transfer.

Exclusivity. Typically 60–90 days from LOI execution. During this period, the seller agrees not to solicit, entertain, or accept acquisition proposals from any other party. This is the most consequential binding provision in the LOI. Sellers should negotiate for a defined exclusivity period with specific milestones — if the buyer has not delivered a purchase agreement draft within 30 days, for example, exclusivity should automatically renew only upon mutual agreement.

Conditions to Closing. Non-binding summary of what must occur for the deal to close: satisfactory completion of due diligence, negotiation of definitive purchase agreement, financing commitment, regulatory approvals (if any), and key employee agreements. The conditions section sets expectations for both parties.

Transition Period and Employment. For acquisitions where the selling principal will remain post-close, the LOI should outline the term, role, and compensation. For healthcare, professional services, and other regulated businesses, the transition employment terms are often significant and should be addressed in the LOI rather than left to the purchase agreement stage.

Confidentiality and No-Shop. Confidentiality is typically mutual — neither party discusses the LOI or transaction terms with third parties. The no-shop provision is the binding element that creates the exclusivity obligation.

Purchase Price Mechanics: What Buyers and Sellers Actually Negotiate

The purchase price section of an LOI is rarely as simple as a single number. Multiple valuation adjustments affect the actual proceeds received by sellers and the effective cost paid by buyers.

Enterprise value versus equity value. Enterprise value is the total value of the business (assets minus assumed liabilities exclusive of funded debt). Equity value is what the seller actually receives: enterprise value, minus debt assumed by the buyer, plus cash left in the business at close. A deal priced at $5M enterprise value with $500K of outstanding debt and $200K of cash results in $4.7M in equity value — what the seller nets.

Working capital adjustment. Most LOIs include a working capital mechanism: a target working capital level is defined (typically based on a trailing 12-month average), and the purchase price is adjusted upward or downward based on actual working capital at close. If the business has more working capital than the target, the buyer pays more; if less, the buyer pays less. The working capital target is heavily negotiated — sellers want a low target (maximizing surplus adjustments in their favor); buyers want a high target.

Earnouts. An earnout is a contingent payment tied to the business achieving specified financial metrics post-close. Earnouts are used when buyer and seller disagree on the value of future performance — the buyer pays a base price now and additional amounts if the business meets targets. Earnouts are common in behavioral health, software, and other businesses with growth projections. They are also frequently a source of post-close disputes and litigation. LOIs that include earnouts should specify: the metric (revenue, EBITDA, or other), the target period (12 months, 24 months), the maximum earnout amount, and the protection mechanisms for sellers (buyer cannot artificially suppress metrics to avoid the earnout).

Seller notes. A portion of the purchase price carried as a promissory note from buyer to seller. Seller notes are common in SBA-financed deals and in transactions where there is a valuation gap between buyer and seller. Standard seller note terms: 5–7% interest, 5-year term, principal payments deferred during any SBA standby period.

Exclusivity: The Most Important Binding Provision

Exclusivity in a business acquisition LOI is the provision that matters most to sellers and requires the most careful negotiation. Once exclusivity is granted, the seller loses the ability to use competing offers as negotiating leverage during due diligence — the most psychologically difficult period of the transaction.

Standard exclusivity terms run 60–90 days from LOI execution. Some PE buyers request 120-day exclusivity to allow time for fund-level approval processes; sellers should resist this unless there is a clear business reason.

Sellers should negotiate two protections into the exclusivity provision:

First, milestone-based exclusivity. Define specific milestones the buyer must hit to maintain exclusive status: delivery of a due diligence request list within 10 business days, preliminary due diligence findings delivered within 30 days, purchase agreement draft delivered within 45 days. If the buyer misses milestones, exclusivity terminates or requires mutual renewal. This prevents buyers from using exclusivity to tie up the seller while running a parallel process on other deals.

Second, a break fee or reverse break fee. Some LOIs include a break fee provision: if the buyer walks away after due diligence without cause, they pay the seller a specified fee ($25K–$100K depending on deal size) to compensate for lost time and opportunity. Break fees are more common in PE-backed acquisitions than individual buyer deals.

For sellers who receive multiple LOIs simultaneously — which is the goal of a well-run auction process — the right move is to negotiate with all serious buyers before granting exclusivity to any single buyer. Exclusivity is valuable, and granting it prematurely eliminates leverage.

Industry-specific LOI considerations are covered on the individual practice pages for dental practices, home health agencies, engineering firms, and behavioral health practices.

Asset Sale vs. Stock Sale: How the LOI Locks In Tax Outcomes

The single most consequential financial decision in the LOI is whether the transaction is structured as an asset sale or a stock sale. This decision drives tax outcomes for both parties and affects which contracts, licenses, and liabilities transfer to the buyer.

For sellers:

In a stock sale, the seller sells equity (stock or membership interests). The gain is a capital gain — subject to long-term capital gains rates (0%, 15%, or 20% depending on the seller's income, plus 3.8% net investment income tax for higher earners) rather than ordinary income rates. On a $3M gain, the difference between capital gains treatment and ordinary income can be $300K–$600K in federal tax.

In an asset sale, the proceeds are allocated across asset categories — tangible assets (furniture, equipment), intangible assets (goodwill, customer relationships, non-compete agreements). Different asset categories have different tax treatment. Goodwill receives capital gains treatment. Depreciation recapture on sold assets is taxed at ordinary income rates. Non-compete agreement proceeds are taxed as ordinary income. Asset sales produce blended tax outcomes that are typically less favorable to sellers than stock sales.

For buyers:

In a stock sale, the buyer inherits the seller's tax basis in all assets — there is no step-up in basis. The buyer cannot accelerate depreciation on acquired assets because they acquired the assets at their existing (low) book value.

In an asset sale, the buyer allocates the purchase price across asset categories, establishing a new (stepped-up) tax basis. The buyer can then depreciate tangible assets and amortize intangible assets (goodwill is amortized over 15 years under IRC Section 197). This creates tax benefits that make asset sales economically preferable for buyers.

The practical resolution: buyers want asset sale treatment; sellers want stock sale treatment. When the structure cannot be agreed on, the standard compromise is a stock sale with a Section 338(h)(10) election — available for C corporations and S corporations — which allows both parties to treat the transaction as an asset sale for tax purposes while closing it as a stock sale for legal and contractual purposes.

LOI Checklist: What Every Business Acquisition LOI Should Include

The following items should appear in every business acquisition LOI. Missing any of these creates ambiguity that resurfaces during purchase agreement negotiation.

• Total purchase price — stated as a dollar amount, not just a multiple
• Consideration structure — cash at close, seller note (amount, rate, term), earnout (metric, period, maximum), equity rollover (percentage, valuation)
• Deal structure — asset sale or stock sale; if asset sale, which assets are included and which liabilities are assumed
• Working capital target and adjustment mechanism — target level, measurement period, and whether surplus/deficit adjusts price
• Debt and cash treatment — confirm debt-free/cash-free basis or specify which debt is assumed
• Exclusivity period — length (60–90 days recommended), milestones, and conditions for extension or termination
• Conditions to closing — due diligence completion, definitive agreement, financing, regulatory approvals
• Transition and employment terms — seller role post-close, duration, compensation, any non-compete provisions
• Confidentiality — mutual confidentiality obligation covering LOI and transaction terms
• Break fee provisions — if applicable, amount and trigger conditions
• Governing law — state whose law governs interpretation of the LOI
• Expiration date — LOI should specify when it expires if not executed by both parties

Frequently Asked Questions