A letter of intent (LOI) is a short document that writes down the main deal terms after you and the seller agree on them and before the full purchase agreement. Price, structure and timeline are commonly non-binding, while a few promises, such as exclusivity and confidentiality, often bind. Which parts bind depends on how the LOI is drafted and on state law, so have deal counsel read it before you sign. This primer is for buyers who are about to sign an LOI, or who were just handed one by a seller or a business broker.
The short answer
- An LOI is a first written outline of the deal. It commonly mixes non-binding deal terms (price, structure, timeline) with a few binding provisions (exclusivity, confidentiality, expenses).
- "Non-binding" does not fully protect either side. How a court reads an LOI depends on how it is drafted, what the parties intended and which state's law applies. In Delaware, for example, an express promise to negotiate in good faith has been enforced even though the term sheet itself was not binding.
- Exclusivity (the seller agrees not to talk to other buyers) is a term buyers often negotiate closely, because a period that is too short can run out before diligence, financing and insurance work are done. Ask counsel how long fits your deal.
- Questions to settle with deal counsel and your lender before you sign: asset or stock purchase, how much is paid at closing, any seller note or earnout, and a rough working capital target. Add an insurance diligence line so the seller's policies, loss runs and cooperation are on the table from day one.
- Morrow is an insurance agency, not a law firm. Ask deal counsel what each clause means in your state and for your deal.
What does a letter of intent actually do?
Think of the LOI as the bridge between a handshake and a contract. By the time you sign one, you and the seller have agreed on roughly what the deal looks like. The LOI writes that down so that both sides, their lenders and their advisors work from the same page while diligence (your investigation of the business) begins. Some people call the same kind of document a term sheet. The label matters less than what the document says and which parts it makes binding.
After the LOI is accepted, diligence starts. One sell-side advisory firm describes the usual sequence: the LOI is "usually non-binding," the buyer's attorney normally prepares the full purchase agreement, and the signed agreement then replaces the LOI.
How long does that take? The same firm says diligence "typically lasts 30 to 60 days" in its deals. That is one firm's experience, not a rule. Loans backed by the Small Business Administration (SBA) can take longer, because lender underwriting, including its own independent valuation, adds steps, so ask your lender for its timeline. The SBA's own guide for people buying an existing business lists a letter of intent among the documents a buyer typically sees, alongside the confidentiality agreement, financial statements, tax returns and the sales agreement.
For a searcher or an acquirer, the LOI does three practical jobs. It takes the business off the market for a period. It gives your lender and investors a concrete deal to underwrite. And it sets the anchor for price talks: it is easier to move a number in diligence if you have a documented reason, and harder if the LOI never said what the number was based on.
Which parts of an LOI are binding and which are not?
Whether an LOI binds depends mainly on how it is drafted and on what the parties intended. Practitioners advise labeling each provision as binding or non-binding and saying plainly that neither side is liable on the non-binding terms. The table shows the common pattern. It is a general description, not a promise about any document.
| LOI term | Often treated as | What to watch |
|---|---|---|
| Price, payment form, seller note, earnout | Non-binding, subject to diligence and the purchase agreement | Vague wording invites a re-trade (the seller reopening the price after you have spent money on diligence). Say what the price assumes, for example earnings adjusted for one-time items. |
| Structure (asset, stock or merger) | Non-binding | Changes what you inherit and which contracts, licenses and policies move. See asset purchase vs stock purchase. |
| Exclusivity (no-shop) | Often binding | Start date, end date, and whether it can be extended while you are making progress. |
| Confidentiality | Often binding | Whether you may share the LOI and financials with your lender, investors, accountant and insurance broker. |
| Who pays deal expenses | Often binding | One Texas firm notes a non-breaching party may recover expenses incurred in reasonable reliance on the LOI. |
| Good-faith negotiation | Can be binding if written as an express promise | In Delaware, an express promise to negotiate in good faith has been held enforceable even where the term sheet was not (see below). Other states differ. |
| Governing law and where disputes are heard | Often binding | Decides which state's rules apply to everything above. |
"Non-binding" is not a force field. In one well-known Delaware case, the state's Supreme Court affirmed a $113 million damages award (December 23, 2015) against a party that broke an express, written promise to negotiate in good faith over a term sheet. That case involved a pharmaceutical merger and license dispute, with the good-faith promise written into separate binding agreements. Under the Delaware standard that commentators describe, simply failing to reach a deal is not by itself bad faith; the case turned on a finding that one side negotiated dishonestly. Other states differ. Treat the case as a reason to have counsel read your LOI, not as a risk in every small deal. A Texas firm adds that courts there "normally honor" clearly stated non-binding disclaimers, but claims such as promissory estoppel (a promise someone relied on to their cost) and fraud can still arise outside the binding terms. Other states differ.
What terms usually go into a letter of intent?
Contents vary, and small deals often use shorter LOIs. A typical outline covers the following. Use it as a checklist when you read a draft.
- The parties. Correct legal entity names for buyer and seller. If your acquisition vehicle is not formed yet, say so and say who will assume the deal.
- Structure. Asset purchase, stock (or membership interest) purchase, or merger.
- Price and how it is paid. Cash at closing, any seller financing or earnout, rollover equity, and any amount held back or escrowed for claims.
- A working capital target. A preliminary target for the normal level of working capital the seller leaves in the business. One advisory firm notes this estimate is not legally binding and the final figure is set in diligence. See working capital and the peg.
- Financing and other conditions. Your lender or investor approval, landlord consent, transfer of licenses and contracts, and any key employee or customer conditions.
- Diligence scope and timeline. What access you get, to whom, and by when. The due diligence checklist shows what to ask for.
- Seller transition and non-compete expectations. How long the seller helps and what they agree not to do afterward. These are covered in non-competes and transition agreements.
- Binding provisions and termination. Exclusivity, confidentiality, expenses, governing law and when the LOI expires.
If you are using an SBA 7(a) loan, ask your lender and counsel how its rules affect the LOI before you sign. For example, in an Initial Acquisition (the SBA's default category, typical for a first-time buyer) the seller generally may not stay on as an officer, director, stockholder or employee (a consulting contract of up to 24 months in total is allowed), and seller earnouts are prohibited. Confirm each point with your lender.
How long should exclusivity last, and what will the seller want in return?
There is no standard length. One Texas firm describes exclusivity as "often 30 to 90 days," but that is practitioner experience, not survey data, and the right answer depends on how long your own work takes. Sellers prefer shorter periods because the business is off the market. Buyers want enough time to finish diligence, complete the lender's underwriting and negotiate the purchase agreement without a competing bidder appearing.
A hypothetical example. A buyer signs an LOI for an asset purchase with a 60 day exclusivity period. The buyer's SBA lender orders its own independent valuation, the buyer's accountant is still waiting on bank statements, and the seller is slow to request loss runs (the carrier-issued claims history) from its insurers. With the clock running, the table shows how the weeks might stack up. The numbers are illustrative only.
| Weeks | Work in progress | Risk to the schedule |
|---|---|---|
| 1 to 2 | Data requests out, accountant starts, broker asks for policies and loss runs | Seller answers slowly; items arrive in pieces |
| 3 to 5 | Financial diligence, customer and employee questions, lender underwriting | A finding forces a price or structure conversation |
| 6 to 7 | Lender's valuation lands; insurance quotes based on loss runs | Valuation or quotes come in different from the model |
| 8 to 9 | Purchase agreement still being negotiated when day 60 arrives | Exclusivity expires before the agreement is signed |
In that picture the buyer would reach the end of exclusivity with the agreement unsigned, and would have to ask for an extension just when the seller has the most leverage. Common ways to manage this, to discuss with counsel, include tying the exclusivity end date to milestones, writing in an automatic extension while both sides are negotiating in good faith, or asking the seller to commit to delivery dates for the documents you need. In return, sellers sometimes ask for a deposit, a faster timeline or a stronger financing showing. Those are negotiating choices, not requirements.
What insurance line items belong in your letter of intent?
Insurance can get lost between the price talks and the purchase agreement, so the records may arrive late in the exclusivity period. A short insurance clause is easy to ask for and can help keep diligence moving. Ask deal counsel to consider language that covers:
- Access. The seller will provide current declarations pages, full policies with endorsements, loss runs and the list of open claims, and will let your broker speak to the seller's agent.
- Workers' compensation records. Payroll by class, the experience modification worksheet (a factor that adjusts premium by claims history) and recent premium audits. In states that follow National Council on Compensation Insurance (NCCI) rules, experience generally follows the business to the new owner, including in an asset purchase where you continue the operations. Other states differ: some use independent rating bureaus, four states (Ohio, North Dakota, Washington and Wyoming) require coverage from a state fund, and very small employers may have no mod. Ask your broker how your state treats the change. See new owner review: workers' compensation.
- Contract and certificate records. Customer and lease insurance requirements, and copies of the certificates the seller has issued.
- Cooperation and continuity. The seller keeps policies in force and in good standing through closing, reports claims and changes promptly, and cooperates with the carrier work you need after closing. In a stock deal, the seller identifies claims-made policies with change in control provisions and gives any notice they require.
- Claims-made tails. In an asset deal, practitioners often ask the seller to buy an extended reporting period (a tail) on claims-made policies. See prior acts and tail coverage.
- Insurance at closing. Your own coverage bound and confirmed by the carrier before funds move. A quote or application is not bound coverage.
For the full pre-closing list, see the library's insurance checklist for buying a business, and for what happens next, whether to keep the seller's insurance or start over. If you use an SBA loan, lender insurance requirements will shape what you bind.
What should you check before you sign?
Use this as a sanity pass before the draft goes to the seller. Each item has an owner. Counsel, your accountant, your lender and your broker split these between them.
| Check | Who to ask |
|---|---|
| Which clauses are binding, and under which state's law? | Deal counsel |
| Does the price rest on a defined earnings figure and a quality of earnings review? | Accountant (see quality of earnings) |
| Does the structure fit the lender's rules (seller role, seller debt, earnout limits)? | Lender |
| Is exclusivity long enough for diligence, underwriting and insurance work? | Counsel, lender, broker |
| May you share the LOI and records with your lender, investors and insurance broker? | Counsel |
A Morrow review before signing can help you list the insurance records to request and flag what the seller's current program might mean for your costs. Morrow is not a lawyer or a lender, and a review is not coverage.
Keep reading
- Due Diligence Checklist for Buying a Small Business
- Asset Purchase vs Stock Purchase When Buying a Business
- What a Business Purchase Agreement Covers
- Working Capital and the Peg Explained for Business Buyers
- Seller Financing and Earnouts: What Buyers Need to Know
- All guides for new business owners
Frequently asked questions
Is a letter of intent legally binding?
Usually only in part. Deal terms such as price and structure are commonly non-binding, while exclusivity, confidentiality and expenses are often binding. Which parts bind depends on how the document is written and on state law, so ask deal counsel to read it before you sign.
Can I walk away after signing a letter of intent?
Often yes on the non-binding deal terms, but check the binding provisions first. Exclusivity, expense clauses and any promise to negotiate in good faith can still apply. Whether you can walk away without liability depends on the exact wording and your state's law, and your reason for walking away may matter, so talk to counsel before you do.
Can the seller back out after we sign a letter of intent?
On the non-binding deal terms, often yes, which is why exclusivity matters. While a binding exclusivity clause is in force, a seller who talks to other buyers may be breaking a promise. Ask deal counsel what remedies your LOI gives you.
Do I need a lawyer for a letter of intent?
It is wise to have one read it. The document is short, but its binding terms can carry real consequences, and you generally cannot fix a loose clause after you sign. Your attorney can also check that the structure matches what your lender will approve.
How long does it take to go from a letter of intent to closing?
It varies. One sell-side advisory firm says diligence typically runs 30 to 60 days in its deals. Loans backed by the SBA can take longer because of lender underwriting and independent reports, so ask your lender for its timeline. The dates in your own LOI and purchase agreement control.
Does insurance belong in a letter of intent?
It is not required, but a short clause that gives you access to the seller's policies, loss runs and agent, and asks the seller to keep coverage in force through closing, can help keep diligence moving. Ask deal counsel how to word it.
References
- Parker Poe Adams & Bernstein: Is That Letter of Intent Enforceable? (March 8, 2016)
- Hendershot Cowart P.C. via JD Supra: Texas Letter of Intent Guide, When Are LOIs Legally Binding (February 16, 2026)
- Supreme Court of Delaware: SIGA Technologies, Inc. v. PharmAthene, Inc., No. 20, 2015 (December 23, 2015)
- Morgan & Westfield: Acquired, Ch. 22, From Signing to Closing (sell-side advisory firm, 2026)
- U.S. Small Business Administration: Buy an existing business or franchise
- U.S. Small Business Administration: SOP 50 10 8.1, Appendix 15, change of ownership (effective October 1, 2026)
- Morgan & Westfield: Net Working Capital (NWC) for M&A, A Complete Guide (sell-side advisory firm, 2026)
- NCCI: Experience Rating Plan Manual, Item E-1411, ownership change rules (effective July 1, 2025)
- American Academy of Actuaries: Influential Features in the Workers' Compensation System (October 2025)
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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.