When you're buying or selling a small business, one of the first major milestones in the M&A process is signing a Letter of Intent (LOI). Before a buyer dives into financials or a seller pays legal fees to draft closing documents, both sides typically align on the key deal terms through the LOI.

As I mentioned in my last post, The Small Business M&A Process: What to Expect When Buying or Selling a Business, the LOI is foundational. It outlines the essential terms of a small business acquisition, such as purchase price, structure, and exclusivity without legally committing either party to close the transaction.

But what exactly goes into an LOI, and why does it matter so much?

In this post, I’ll break down the key components of a well-drafted LOI, highlight common pitfalls, and explain how this early-stage document sets the tone for the rest of the small business M&A process. Whether you're buying or selling a small business, getting the LOI right is critical to avoiding costly surprises and keeping your deal on track.

‍

What to Expect: The Key Components of a Strong LOI

The LOI is the cornerstone of any small business transaction. While some elements of the deal will be finalized in the definitive agreements, the LOI captures the economic and structural fundamentals. Trying to “retrade” those terms later can destroy the trust built between parties and derail your transaction.

Here are the essential components every small business buyer or seller should expect and understand.

Transaction Description: Who’s Buying What from Whom?

This is the backbone of the LOI. Be clear and specific:

• Is the deal structured as an asset sale or equity sale?
• Who is the buyer—an individual or a legal entity?
• What assets or shares are being acquired?
• What, if anything, is excluded from the transaction?

Precision matters. If the LOI is in your personal name, but the acquisition closes through an LLC, that’s not just a technicality; it can open you up to liability you didn’t intend to assume.

Purchase Price & Payment Structure

This is the headline number, but it’s almost never just one number.

The LOI should outline:

• Total purchase price
• Payment method (cash, seller note, earn-out, equity, etc.)
• Any escrows or holdbacks
• Whether working capital is included and how it’s determined

Be specific enough to prevent future disputes, but don’t treat this like the definitive agreement; just paint a clear picture of what’s on the table. Think of it as a clear, high-level roadmap.

Reps, Warranties & Indemnification

You’re not drafting the purchase agreement yet, but you are setting the tone. The LOI should still reference expectations around representations, warranties, and indemnification.

The LOI should state that the definitive agreements will include “customary” representations and warranties. In other words, we’re not buying this business “as-is” and we expect contractual commitment to the statements made with respect to the business, assets, etc. For example, a buyer may expect the seller to make binding assurances in the final agreement about the business, assets, operations, and liabilities.

You can choose to leave indemnity terms vague to maintain flexibility or be specific to avoid surprises.  Often the former is how deals proceed. Know that in small business deals, sellers (and their lawyers) can be less familiar with M&A norms and detail. The right level of detail can either establish productive expectations or create early friction.

Having an experienced M&A attorney by your side at this stage helps strike the right balance, protecting your interests without overloading the LOI and ensuring that key protections like reps and indemnities are framed in a way that sets the deal up for success.

Conditions to Closing

These are all the requirements that must be met for you to be willing to close the transaction. This is the final safety net.

Common contingencies include:

• Financing
• Satisfactory diligence results
• Required third-party consents
• Employment offers to key team members
• Execution of definitive documents

Be transparent from the start. Outline any “must-haves” for you to close. Surprises kill trust and deals.

Non-Compete/Non-Solicitation

It’s good practice to mention that restrictive covenants—like non-competes and non-solicits—will be included in the definitive agreements. Often, the specific term of years and geographic scope are not introduced until the definitive agreement draft, but it’s good practice to refer to the inclusion of these covenants in the LOI. 

Confidentiality

Many buyers assume a pre-LOI NDA covers both sides, but that’s not always true. For example, the seller’s broker might have presented you with an NDA that protects only the seller’s information. If you’re now sharing sensitive details (such as financing structure, investor conversations, or strategy) your side needs protection too.

Include a confidentiality clause in the LOI itself. It should cover mutual obligations, especially if you’re sharing sensitive info about financing, equity, or structure.

Exclusivity/No-Shop Provision

This is the most important clause in the LOI.

Exclusivity protects the buyer’s investment of time, money, and energy in the prospective transaction. Once you’re conducting diligence, involving lenders, or even bringing in outside capital, you need assurance that the seller will cease continuing to shop the deal until you have decided to pass or the time frame has lapsed. 

The exclusivity (or “no-shop”) clause typically prohibits the seller from soliciting, entertaining, or negotiating with other potential buyers for a defined period—often 30 to 90 days. This gives you a fair shot at getting the deal done without the risk of being blindsided at the eleventh hour.

Some sellers may push back, arguing that they shouldn’t “take the business off the market” unless a binding deal is signed. But that defeats the purpose of an LOI. 

If a seller refuses to grant exclusivity, that’s a red flag. You’re being asked to commit resources to a game with no rules.

What Happens If the Seller Breaches Exclusivity?

If the seller violates the exclusivity agreement, say, by engaging another buyer or disclosing deal terms, you may have contractual remedies, including:

• Injunctive relief: A court can prohibit the seller from proceeding with discussions or closing with a competing buyer during the exclusivity period.
• Reimbursement of expenses: Some LOIs include a clause that requires the seller to reimburse the buyer’s out-of-pocket diligence and legal costs if the seller breaches exclusivity.
• Tolling the exclusivity period: The exclusivity period may be extended if a breach occurs, allowing the buyer additional time to complete the process.
• Reputational consequences: While not a legal remedy, word travels fast in the small business M&A ecosystem. Sellers who break exclusivity often damage their reputation and may deter future serious buyers.

Keep in mind: Remedies only work if the exclusivity provision is clearly drafted and binding. Be explicit about this in your LOI. This is an example of why expert guidance early on is critical to protecting you if anything falls through in the deal. 

Binding vs. Non-Binding Provisions

Most of the LOI should be non-binding.

But some parts must be binding, including:

• Confidentiality
• Exclusivity
• Governing law and dispute resolution
• Remedies

Be clear about which sections bind the parties and which are aspirational. Working with your attorney to include a simple statement like this can be helpful: “Sections [x] through [y] of this LOI are binding obligations on the parties (the “Binding Provisions”). Except for the Binding Provisions, this LOI is merely a description of terms for a potential transaction and is not binding between the parties.” 

‍

Final Thought

A thoughtful, well-drafted LOI sets the tone for the entire transaction. It gives both parties a clear understanding of expectations and reveals how each side approaches negotiation and risk.

Whether you’re selling or buying a small business, use this opportunity to build trust, avoid misunderstandings, and shape a smoother, more successful M&A closing process.