THE SHORT ANSWER
A business-sale LOI should explain the proposed transaction, payment structure, diligence process and major conditions. Have counsel identify which provisions could bind you, including exclusivity and confidentiality. An LOI is not proof of financing or a substitute for the purchase agreement, and its title alone does not determine its legal effect.
Identify the document’s commitments
Before discussing individual numbers, ask counsel to explain what the document commits each party to do, what remains proposed and how either party can end the process. Identify the governing law, parties, signing authority, duration and any conduct required after signing.
ABA analysis explains why preliminary agreements can have mixed or disputed effects; a general nonbinding label does not settle every obligation.
(ABA: How Does One Agree to Agree?)Check how the LOI interacts with an existing NDA, broker engagement or other agreement. Mark unresolved drafting questions instead of treating a form’s heading as an answer. Counsel should review the complete version you would sign, including exhibits and revisions.
Translate the stated price into seller economics
| LOI topic | Question before signing |
|---|---|
| Price basis | Enterprise value, equity value or specified asset price? |
| Scope | Which assets, ownership interests and liabilities are included? |
| Payment | Closing cash, note, earnout, holdback or equity? |
| Adjustments | Which debt, cash, working-capital and expense definitions apply? |
| Tax structure | What legal form and elections are proposed? |
Reconcile the components to the headline price. Identify what is conditional, illustrative or still unagreed. Ask your accountant to test a sample closing statement and flag potential double counting. Do not subtract debt twice when a quoted equity price already reflects it, or count an escrow release as an additional purchase-price component.
Tie the process to actual dependencies
List the buyer’s funding status, required diligence, consents, valuation work and other known closing conditions. Ask which materials are needed before the next decision and who will provide them. A preliminary lender conversation is not a funding commitment.
For exclusivity, examine the start, end, permitted activities, notice rules, milestones and extension process with counsel. Keep a task log rather than relying on a universal 30-, 60- or 90-day timetable. An exclusivity period can impose real restrictions while financing or diligence remains unresolved. Evaluate whether the proposed work and the available time fit this transaction before accepting the restriction.
Address continuing obligations early
Outline any transition employment, consulting, lease, noncompetition, seller note or rollover expectations before they become surprises in the purchase documents. Ask whether the proposal contemplates indemnity obligations, a holdback, buyer setoff rights or performance-dependent payments. Their detailed treatment still needs negotiated legal documents.
For example, “seller will assist after closing” leaves hours, duties, compensation and duration unanswered. Record those questions and who will resolve them. Use the consideration comparison and seller-financing questions as preparation. Keep discussions coordinated among counsel, accountant, lender and advisor; this checklist does not draft an enforceable LOI or determine its suitability.
Owner questions
Is every LOI nonbinding?
No. Its provisions, wording, facts, conduct and applicable law determine obligations. Counsel should assess the specific document.
Does signing an LOI mean the loan is approved?
No. The buyer must establish its actual financing status and satisfy remaining conditions.
Does every business sale need a deposit in the LOI?
There is no universal requirement stated here. Deposit, custody, refundability and forfeiture terms require transaction-specific review.
Sources and review scope
Source review completed . The sources below support the identified concepts or rules; they do not validate hypothetical amounts or a valuation of your business.
- ABA: How Does One Agree to Agree?
Why a letter's title or general nonbinding recital does not determine every obligation. Enforceability depends on wording, conduct, facts and applicable law.
Confirm tax, legal, accounting and lending applications with the relevant professionals. Historical market observations describe the stated period and reported sample.
This is educational material. Industry figures and program rules can change; check the original sources and your advisors before applying them to a transaction. Calculator scenarios are not appraisals, lending decisions, or offers.
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