Letter of Intent Example for Buying a Business: Step-by-Step Guide

A letter of intent example for buying a business shows how a buyer’s offer is written down before the lawyers draft the purchase agreement: who is buying what, for how much, how the price gets paid, how working capital and debt are handled, how long diligence and exclusivity last, and which few provisions are meant to be binding. Below is a full annotated example for a hypothetical $2.4 million asset purchase financed with an SBA 7(a) loan, followed by how to adapt it and what to check before you sign.

One limitation up front: the example is illustrative. It isn’t a DueDilio standard form or legal advice, and no sample language is safe in every state or deal. Use it to understand and negotiate the business terms, then have your transaction attorney draft deal-specific language.

The guide runs in the order you’ll use it: what a letter of intent (LOI) does, the deal facts, the example, how to adapt it, what binds, how each term flows downstream, a pre-signing checklist and what comes after.

What a business acquisition LOI does

A letter of intent is a short document that records the proposed economics and process of an acquisition before anyone signs the definitive agreements. The American Bar Association describes the LOI as the stage where the parties summarize the major deal points and set the procedures for negotiation and due diligence. It usually comes after you’ve seen the financials and before you spend serious money on due diligence. On larger deals, a less detailed indication of interest (IOI) sometimes comes first; see IOI vs. LOI.

Most LOIs mix two kinds of provisions. Deal terms such as price and structure are usually nonbinding: they describe what the parties intend to put in the purchase agreement. A handful of process terms, such as exclusivity, confidentiality and expenses, are usually meant to bind on signing. As an ABA Litigation Journal article on “agreements to agree” explains, courts can look at the parties’ language and conduct, not just a heading, to decide what they actually committed to. Whether a particular LOI is enforceable depends on its wording and the governing law; that analysis lives in Is an LOI Binding?.

The seller wants a committed price and certainty. The buyer wants the business off the market before paying for a quality of earnings review, legal diligence and lender fees. A good LOI trades those fairly. Because it shapes everything after it, it deserves care, not fear.

Before reading the example: the deal assumptions

Every number and date in the example ties back to this fact pattern. If your deal differs on a line, the matching LOI language changes too.

Sources and uses:

Why the financing is shaped this way: under the SBA’s lender rules as of this review (SOP 50 10 8.1, Appendix 15, “7(a) Changes of Ownership”), a buyer acquiring a business with a 7(a) loan must inject equity of at least 10% of total project cost, here $260,000. Seller debt counts toward that only if it’s subordinated to the lender and on full standby, meaning no principal or interest payments for the term of the 7(a) loan. Standby seller debt and similar limited sources can supply no more than half of the required injection, so the $120,000 note stays under the $130,000 cap and the buyer’s own $180,000 covers the rest: $300,000 in total, about 11.5% of project cost. SBA revises its SOP periodically and the version your lender works under governs, so confirm these points with your lender.

Hypothetical and illustrative only. Not a lender quote, not a DueDilio standard form, not legal or tax advice.

Letter of intent example for buying a business (annotated)

The letter text is in the quoted blocks; the notes after each explain why and what to watch.

Sections in the example:

• Parties and what’s being bought: 1 Parties, 2 Transaction form, 3 Assets and liabilities
• Price and payment: 4 Purchase price and assumptions, 5 Net working capital, 6 Cash and debt, 7 Consideration
• Diligence, financing and conditions: 8 Due diligence and access, 9 Financing, 10 Conditions to closing
• Deal protections: 11 Exclusivity, 12 Confidentiality, 13 Employees, customers and announcements, 14 Expenses
• Timing and transition: 15 Real estate, 16 Timing and transition
• Legal effect: 17 Binding and nonbinding provisions, 18 Termination, 19 Governing law, signatures

Parties and what’s being bought

[BuyerCo letterhead]

[Date]

[Owner Name] Target HVAC, Inc. [Address]

Re: Letter of intent for the purchase of the assets of Target HVAC, Inc.

Dear [Owner Name]:

This letter sets out the principal terms on which BuyerCo, LLC proposes to acquire the business of Target HVAC, Inc. Except as stated in Section 17, this letter is a statement of intent only and does not create a binding obligation to complete the transaction.

1. Parties. The buyer will be BuyerCo, LLC, a [State] limited liability company (“Buyer”). The seller will be Target HVAC, Inc., a [State] corporation (the “Company”), and [Owner Name], its sole shareholder (“Shareholder”).

2. Transaction form. Buyer will purchase substantially all of the assets used in the Company’s business (the “Transaction”). Buyer will not purchase the Company’s stock or assume its liabilities except the Assumed Liabilities in Section 3.

Name the exact legal entities, not trade names. If your acquisition company isn’t formed yet, say the buyer “or an entity it forms” will sign, because your lender will want the loan and assets in one entity. Name the shareholder too: the owner usually gives the non-compete and some representations.

Form is the most consequential structural choice. In an asset purchase, you pick which assets and liabilities come with you; in a stock (equity) purchase, you buy the entity, history included. Tax, liability and consent consequences differ, so settle it here.

3. Assets and liabilities. The purchased assets will include all equipment, vehicles, inventory, accounts receivable, prepaid expenses, customer contracts and lists, phone numbers, websites, trade names, software licenses, transferable permits and goodwill of the business (the “Purchased Assets”). Excluded assets will include cash, bank accounts, corporate records, and tax refunds. (The building is owned by Shareholder’s affiliate, not the Company, so it is not part of this sale; see Section 15.) Buyer will assume only ordinary-course trade payables and accrued expenses included in Net Working Capital (the “Assumed Liabilities”). All other liabilities, including all debt, taxes and pre-closing liabilities, remain with the Company.

The asset list decides what your price buys. Receivables and payables are listed because they’re part of the working capital the price assumes (Section 5). Listing excluded liabilities is what “debt-free” means in practice.

Price and payment

4. Purchase price and assumptions. The purchase price will be $2,400,000 (the “Purchase Price”), on a cash-free, debt-free basis, assuming delivery of Net Working Capital equal to the Target (Section 5). The Purchase Price is based on the Company’s financial statements and adjusted earnings for the twelve months ended [date] as presented to Buyer, and assumes that diligence confirms them and that there is no material adverse change before closing. Buyer and Shareholder will agree in the definitive agreement on an allocation of the Purchase Price among the Purchased Assets and will report consistently with it for tax purposes.

Stating the assumptions records what the price was based on, so if diligence shows lower adjusted earnings, both sides can see why the price is back on the table. Sellers dislike it; buyers who omit it struggle to justify a price change later.

The allocation sentence is there because this is an asset deal. When a group of assets that makes up a trade or business changes hands and goodwill attaches or could attach, and the buyer’s basis is set only by the amount paid, both buyer and seller must file IRS Form 8594 under Internal Revenue Code Section 1060, allocating the price across the seven asset classes in the Form 8594 instructions, with goodwill in the last. The advisers negotiate the allocation itself for the purchase agreement.

5. Net working capital. “Net Working Capital” means the accounts receivable, inventory and prepaid expenses included in the Purchased Assets, less the Assumed Liabilities, excluding cash, debt and income taxes, calculated using the Company’s historical accounting practices applied consistently. The target Net Working Capital is $180,000 (the “Target”), based on the average monthly Net Working Capital over the twelve months ended [date], subject to confirmation in diligence. The Purchase Price will be adjusted dollar for dollar by the amount that Net Working Capital at closing is above or below the Target, based on an estimate at closing and a final calculation within 90 days after closing.

Working capital is the money tied up in receivables and inventory, net of bills owed; the peg says how much must come with the business. Without one, a seller can collect every receivable and run inventory down before closing, and you’d refill the business with your own cash.

6. Cash and debt. The Company will retain all cash. All indebtedness of the Company, including bank loans, lines of credit, equipment financing and liens on the Purchased Assets, will be paid off or released at or before closing from the Company’s funds or the Purchase Price, so that Buyer receives the Purchased Assets free of liens.

In an asset deal, the seller keeps its cash and uses closing proceeds to pay off its loans. In a stock deal, the entity’s cash and debt come with it, so the share price is adjusted for both (see the economics section).

7. Consideration. The Purchase Price, as adjusted under Section 5, will be paid as follows:

(a) $2,160,000 in cash at closing, subject to the estimated working capital adjustment;

(b) $120,000 deposited at closing with a mutually acceptable third-party escrow agent for 12 months, as security for Shareholder’s indemnification obligations and the final working capital calculation; and

(c) $120,000 by a promissory note from Buyer to the Company (the “Seller Note”), subordinated to Buyer’s senior lender, with no payments of principal or interest for the term of Buyer’s SBA 7(a) loan, and otherwise on terms consistent with the senior lender’s requirements.

No deposit or earnest money will be required from Buyer.

Sellers and their brokers push for the largest closing payment, because escrows and notes are money they may never see. Buyers want part deferred, which keeps the seller financially tied to what they told you.

The seller note has no payment schedule because it’s written to match the lender’s standby rule. Explain full standby to the seller early, or expect the note to be renegotiated when the lender’s standby agreement arrives.

If a seller asks for earnest money, have your attorney spell out when it becomes nonrefundable and when it comes back, for example if the lender declines.

Diligence, financing and conditions

8. Due diligence and access. Within 10 business days after signing, the Company will deliver the documents listed on Exhibit A (the “Initial Request List”). Buyer will have 60 days after the date the Company has delivered all items on the Initial Request List (the “Delivery Date”) to complete its due diligence. The Company will give Buyer and its advisers and lender reasonable access to its books, records, contracts, facilities and management during normal business hours.

If the 60 days start on signing and the seller takes three weeks to upload tax returns, you have five weeks, not eight. The lesson buyers repeat on DueDilio calls: don’t start the clock until you have all the files. Tying the period to delivery of a listed set of documents fixes that.

9. Financing. Buyer intends to finance the Transaction with an SBA 7(a) loan of approximately $2,300,000, Buyer’s equity and the Seller Note. Buyer’s obligation to close will be conditioned on obtaining that financing on terms reasonably satisfactory to Buyer. Shareholder will cooperate with the lender’s reasonable requests, including a standby agreement for the Seller Note.

A financing condition protects you if the lender declines or changes terms. Sellers dislike open-ended ones, so tie it to a specific loan amount and program, and show your lender the numbers before you sign.

10. Conditions to closing. Closing will be subject to: (a) Buyer’s satisfactory completion of due diligence; (b) execution of a definitive asset purchase agreement and related documents acceptable to both parties; (c) funding of Buyer’s financing; (d) execution of the lease described in Section 15; (e) transfer or reissuance of the permits and licenses needed to operate the business; (f) required third-party consents to assignment of key customer contracts; and (g) no material adverse change in the business.

List every approval the deal depends on; landlord, customer, licensing and franchisor consents can take longer than anything else. “Material adverse change” is deliberately left undefined here; counsel will negotiate its definition and carve-outs (such as general economic or industry conditions) in the purchase agreement.

Deal protections

11. Exclusivity. From signing until the earlier of (a) 90 days after the Delivery Date, (b) execution of the definitive agreement or (c) termination of this letter under Section 18, Shareholder and the Company will not solicit, encourage, negotiate or accept any offer from anyone other than Buyer to acquire the business or any material part of its assets or equity, and will promptly tell Buyer about any such approach.

Exclusivity (a “no-shop”) is the main thing you get for signing. Without it, the seller can keep marketing the business while you pay for diligence. A recurring worry on DueDilio calls is a seller “shopping” the deal after the buyer has started spending. My rule is simple: no exclusivity, no diligence spend. Broker-drafted LOIs sometimes omit it, because the broker’s job is keeping the seller’s options open. Tying the end date to the Delivery Date means seller delays extend your protection instead of eating into it.

12. Confidentiality. The confidentiality agreement between Buyer and the Company dated [date] remains in effect. Neither party will disclose the existence or terms of this letter, except to advisers, lenders and investors who need to know and are bound to keep it confidential.

13. Employees, customers and announcements. Buyer will not contact the Company’s employees (other than [names or roles]), customers, suppliers or landlord about the Transaction without Shareholder’s prior consent, which will not be unreasonably withheld. No party will make any public announcement about the Transaction without the other’s written consent. Buyer intends to offer employment to substantially all of the Company’s employees on terms to be agreed.

14. Expenses. Each party will pay its own expenses in connection with this letter and the Transaction, whether or not it closes. Any business broker’s fee is the responsibility of the Company.

Confidentiality should carry over the existing NDA while letting you share information with your lender and advisers. Sellers fear news of a sale will scare off employees and customers; buyers need to talk to key people. The workable answer is controlled access: name who you can talk to now and schedule the rest jointly. If a broker is involved, say who owes the fee.

Timing and transition

15. Real estate. The Company operates from [address], owned by [Property LLC], an affiliate of Shareholder. At closing, Buyer and [Property LLC] will sign a lease with an initial term of [five] years and renewal options, at a rent of [$X] per month, on terms acceptable to Buyer’s lender.

16. Timing and transition. The parties will use good-faith efforts to sign the definitive agreement within 60 days after the Delivery Date and to close within 90 days after the Delivery Date. For 90 days after closing, Shareholder will provide transition assistance under a consulting agreement to be agreed. Shareholder will agree to non-competition and non-solicitation covenants of a scope and duration to be set in the definitive agreement, to the extent enforceable under applicable law.

When the seller owns the building, rent is part of the deal’s economics and your lender may care about the lease term. The nonbinding timing targets line up with exclusivity: target closing and exclusivity end on the same day, so if your lender needs longer, change both. With SBA financing, ask your lender early how the seller’s post-closing role must be structured.

Legal effect

17. Binding and nonbinding provisions. Only Sections 8 (last sentence, access), 11 (Exclusivity), 12 (Confidentiality), 13 (first two sentences), 14 (Expenses), 17 (this section), 18 (Termination) and 19 (Governing law) are binding on the parties (the “Binding Provisions”). All other sections are a nonbinding statement of intent. Neither party will be obligated to complete the Transaction unless and until a definitive agreement is signed, and either party may end negotiations for any reason, subject to the Binding Provisions.

18. Termination. This letter will terminate on the earliest of (a) execution of the definitive agreement, (b) mutual written agreement, (c) written notice by Buyer at any time, or (d) written notice by either party after the exclusivity period ends. Sections 12, 14, 17, 18 and 19 survive termination.

19. Governing law. This letter will be governed by the laws of the State of [State], without regard to its conflict-of-law rules.

If these terms are acceptable, please sign below and return a copy by [date and time], after which this offer will expire.

BuyerCo, LLC By: ______________________ Name: [ ] Title: Manager Date: ______

Accepted and agreed:

Target HVAC, Inc. By: ______________________ Name: [Owner Name] Title: President Date: ______

______________________ [Owner Name], individually Date: ______

Section 17 does the most legal work: it lists which provisions bind, says the rest don’t, and says no one must close until a definitive agreement is signed. A “nonbinding” heading isn’t enough on its own; conduct and wording matter too, so counsel should review the whole letter. The expiration date keeps a seller from sitting on your offer while shopping it. Have the Company and the shareholder both sign, and confirm each signer’s authority.

How to adapt the economics to your deal

Every economic term in the example agrees with the others. When you change one, trace it through the rest.

Price vs. enterprise value vs. equity value. A “cash-free, debt-free” price is effectively enterprise value, the value of the operating business. In a stock purchase, the price for the shares (equity value) is roughly enterprise value, plus cash left in the company, minus debt you take on, plus or minus the working capital adjustment. If this business were bought as stock with $210,000 of debt and $40,000 of cash inside, the share price would be about $2,400,000 − $210,000 + $40,000 = $2,230,000, before any working capital adjustment.

The price bridge. Back in the asset deal, here’s how the headline price becomes cash in the seller’s hands, in a separate illustration where closing working capital comes in $15,000 below the peg and the seller has $210,000 of loans to pay off:

Walk the seller through this before signing. In a real closing, the $15,000 reduction would also shrink uses, and the lender’s closing statement would rebalance sources.

Working capital and inventory. Set the peg from an average long enough to reflect seasonality; a peg set on one strong month is a hidden price increase. If inventory is priced separately at closing, take it out of the working capital definition so you don’t pay twice.

Seller note. Decide the amount, rate, term, subordination and payment schedule. Under the same SBA SOP appendix, a full-standby seller note may become eligible for refinancing once it has been in place and current for 36 months. Conventional lenders set their own terms, but nearly all want the note subordinated. For the wider financing picture, see 10 Creative Ways to Finance a Business Acquisition.

Earnout. The example has none because SBA prohibits seller earnouts in 7(a) change-of-ownership loans; it does permit performance-based buyer rebates, which must pay down the 7(a) loan. Elsewhere, an earnout can bridge a price gap; name the metric, who calculates it, the period and a maximum payout.

Rollover equity. If the seller keeps a minority stake, state the percentage and basic rights. In an SBA deal, the SOP says a provider of standby debt may not take an equity investment in the business, so a seller generally can’t both hold a standby note counted as equity and roll equity. Raise it with your lender before offering both.

Escrow or holdback. An escrow holds part of the price with a third party against indemnification claims or the working capital true-up; in a holdback, the buyer keeps the money. State the amount, duration and what it secures.

Sources must equal uses. Every change above moves the sources-and-uses table and means rerunning the equity injection test. Don’t sign an LOI whose numbers your lender hasn’t seen.

How to adapt the process and risk terms

The annotations explain each process term. When your deal differs, these adjustments matter most:

• Longer lender or approval timelines. If your lender, a franchisor or a licensing authority needs more time, extend the diligence period, target dates and exclusivity together, and keep extensions tied to seller delays.
• A stock purchase or regulatory exposure. Widen the diligence scope and access list and name your specialists. For the weeks after signing, see the post-LOI due diligence timeline.
• Heavy dependence on a few customers or employees. Negotiate earlier, named contact with them; their reaction may change the price.
• A deposit or a broker’s form. Add binding refund terms, and confirm exclusivity, termination and survival haven’t been dropped.

Which provisions bind: a provision-by-provision table

This reflects how the example is written, which is common but not universal. Binding effect depends on exact wording, the parties’ conduct and the governing law. For the legal analysis, see Is an LOI Binding?, and have transaction counsel review the whole document.

How each LOI term flows through the rest of the deal

Each LOI term creates diligence work, affects the lender, changes your model, becomes purchase agreement language or turns into a closing step. Use this table to check nothing is forgotten downstream.

Buyer checklist before signing the LOI

Work through this with your attorney and accountant. Anything you can’t check off is a change to the letter or a question for the seller.

☐ Legal names of buyer, seller and any shareholder are correct, and the buyer entity (or its right to assign) is addressed

☐ Each signer has authority to sign for their entity

☐ Defined terms (Purchased Assets, Net Working Capital, Delivery Date) are defined once and used consistently

☐ Transaction form (asset or stock) is stated, with the reason understood

☐ Price bridge works from headline price to cash at closing, with the seller’s view in mind

☐ Working capital definition and peg are stated, with inventory counted once

☐ Sources equal uses, and your lender has seen the structure and seller note terms

☐ Deposit terms, if any, say when money is refundable

☐ Diligence clock starts on delivery of a listed set of documents

☐ Exclusivity is included, long enough, and extended by seller delays

☐ Every third-party approval the deal depends on is a listed condition

☐ Dates agree: diligence, definitive agreement target, closing target, exclusivity end

☐ Binding provisions are listed by section number, and nothing else binds

☐ If the seller or an affiliate owns the premises, the lease terms (rent, term, renewals) are set and acceptable to your lender

☐ Exhibits (document request list, excluded assets) are attached

☐ Your transaction attorney has reviewed the whole letter and the governing law

What happens after the LOI

Signing starts the most expensive and time-sensitive part of the deal, and the LOI doesn’t replace any of what follows:

1. Exclusivity runs. The seller stops marketing the business, and your clock starts.
2. Due diligence. Your advisers test the seller’s claims, starting with the price assumptions and peg.
3. Financing. The lender underwrites the deal and issues a commitment; its conditions often become closing conditions.
4. Definitive agreements. Counsel drafts the purchase agreement, seller note, escrow agreement, lease and consulting agreement, replacing the LOI’s deal terms.
5. Closing. Conditions are satisfied, consents come in, loans are paid off, funds move and documents are signed.
6. Integration. Transition and the first 100 days, planned during diligence rather than after closing.

Of the deals where we know the stage, roughly half come to DueDilio at LOI-signed or later, so many buyers assemble their advisers after the clock has started. If you can, bring in your transaction attorney and financial diligence provider before you sign. If you’d like help finding that team, you can compare independent transaction attorneys and M&A professionals on DueDilio for a deal-specific review.