Many business owners treat the Letter of Intent (LOI) as a formality. A handshake on paper. Something labeled “non-binding,” and easy to defer until the real work begins in the purchase agreement.
That approach is a mistake.
The LOI is not just a preview. It is the foundation. And once it is set, it becomes very difficult to change.
Here is what I see happen too often.
A seller agrees to high-level terms in an LOI without working through the details. The purchase price looks right. The structure seems acceptable. Everyone is eager to move forward.
Then the purchase agreement arrives. Now the real terms show up. Earn-outs with aggressive metrics. Broad indemnification obligations. Working capital adjustments that shift value. Restrictive covenants that go further than expected.
At that point, the seller pushes back.
And the buyer’s response is predictable. “This is what we agreed to in the LOI.”
Even if the language is non-binding, it carries weight. It frames expectations. It sets the tone. And it gives the other side leverage. Walking back terms after signing an LOI is not impossible. But it is uphill. You are often negotiating against your own prior agreement.
That is why the LOI matters more than most people think. It is the moment to slow down. To ask hard questions. To define key terms with enough clarity that there are no surprises later.
At a minimum, the LOI should address:
- Purchase price structure, including any earn-out mechanics
- Payment terms and whether any portion is seller-financed
- Scope and limitations of indemnification
- Treatment of working capital and debt
- Key employment or non-compete provisions
You do not need a full purchase agreement document. But you do need alignment on the issues that drive value and risk. Because once the LOI is signed, the negotiation does not restart. It narrows.
And the side that took the LOI seriously and put the most thought into it is usually the one that comes out ahead.
If you are selling your business, do not treat the LOI as a placeholder.
Treat it like the deal.