Letter of Intent (LOI)

A letter of intent (LOI) is a written document that outlines the preliminary terms and conditions of a proposed transaction between two or more parties. In commercial financing and business acquisitions, an LOI establishes the framework for negotiations by specifying key deal points such as purchase price, financing structure, contingencies, due diligence timelines, and closing conditions. The LOI serves as a roadmap that guides both parties toward a definitive agreement.

Most LOIs are explicitly non-binding with respect to the core transaction terms, meaning neither party is legally obligated to complete the deal. However, certain provisions within an LOI are typically binding, including confidentiality obligations, exclusivity periods (also called "no-shop" clauses), and the allocation of transaction costs. This hybrid structure allows parties to negotiate in good faith while preserving the flexibility to walk away if due diligence reveals material issues.

In Commercial Real Estate transactions, an LOI typically covers the purchase price, earnest money deposit, inspection period, financing contingency timeline, and target closing date. In business acquisition financing, the LOI may also address working capital targets, employee retention terms, non-compete agreements, and the structure of any seller financing component.

For business owners seeking financing or pursuing acquisitions, the LOI represents a critical inflection point in any transaction. It is the moment when informal discussions become structured negotiations with defined terms. A well-drafted LOI accelerates the path to closing by ensuring both parties agree on fundamental deal points before investing significant time and money in legal documentation, due diligence, and third-party appraisals.

From a financing perspective, lenders and SBA-approved lenders often require a signed LOI before they will issue a formal commitment letter or begin underwriting. This is especially true for SBA 7(a) acquisition loans and Commercial Real Estate financing, where the LOI demonstrates that a viable transaction exists and provides the lender with enough detail to assess preliminary eligibility. Without an executed LOI, most institutional lenders will not allocate underwriting resources to a deal.

The LOI also establishes negotiating leverage. The terms set in an LOI tend to anchor subsequent negotiations, so accepting unfavorable terms at this stage can be difficult to reverse later. Business owners who understand which LOI provisions are negotiable, and which represent market standard terms, are better positioned to protect their interests throughout the transaction lifecycle.

• Assuming the entire LOI is non-binding. While core transaction terms are typically non-binding, provisions like confidentiality, exclusivity, and expense allocation are almost always binding and enforceable. Ignoring these sections can create unexpected legal obligations.
• Skipping legal review to save money. An LOI drafted without attorney involvement often contains ambiguous language, missing contingencies, or inadvertently binding commitments. The cost of legal review at the LOI stage is a fraction of the cost of unwinding a poorly structured deal later.
• Agreeing to an excessively long exclusivity period. Exclusivity clauses prevent sellers from negotiating with other buyers (or vice versa). Accepting a 90-day or 120-day exclusivity window without corresponding due diligence milestones gives the other party leverage while removing your alternatives.
• Omitting a financing contingency. Buyers who sign LOIs without a clear financing contingency risk losing their earnest money deposit if they cannot secure funding. The LOI should specify the type and amount of financing required, the timeline for obtaining a commitment letter, and the consequences if financing falls through.
• Treating the LOI as a final agreement. The LOI is a starting point, not a finish line. Material terms will be refined during due diligence, and the definitive purchase agreement or loan documents will contain significantly more detail. Parties who negotiate aggressively at the LOI stage but fail to maintain diligence through closing often encounter surprises in the final documentation.