What an LOI Is — and What It Isn't
A Letter of Intent (LOI) is a non-binding agreement between a buyer and seller that outlines the key economic and structural terms of a proposed acquisition. It is signed before the detailed purchase agreement and before formal diligence begins. Once signed, the LOI typically grants the buyer an exclusivity period — a window during which the seller cannot negotiate with other buyers — in exchange for the buyer's commitment to pursue the deal in good faith.
The LOI is not a binding contract to purchase the business. Either party can walk away during the diligence period for any reason. But the LOI does define the playing field: the price, the structure, the timeline, and the key conditions that must be met before close. Getting the LOI right is essential — it is much harder to renegotiate terms after the seller has emotionally committed to a deal than before.
The Core LOI Components
Every LOI for a business acquisition should address the following:
Purchase Price and Structure. State the total consideration and how it is divided. A typical ETA acquisition might be structured as: $3,000,000 total consideration, consisting of $2,400,000 at close (funded by SBA debt and equity) and $600,000 seller note paid over 5 years at 6% interest. Breaking out the components matters — a seller who sees a $3M number may not immediately appreciate that $600K of that is their own note.
Exclusivity Period. This is the period during which the seller agrees not to negotiate with other buyers. Standard is 60–90 days. Push for 90 days if you can — diligence takes longer than you think, and SBA loan timelines are unpredictable. A 60-day exclusivity period that expires before your SBA commitment letter arrives is a real problem.
Deposit or Good Faith Payment. Some sellers require a deposit (typically $10K–$25K, fully refundable if the deal does not close due to diligence findings) as a signal of buyer commitment. This is negotiable. If a seller insists on a non-refundable deposit, that is a yellow flag — quality sellers do not need to trap buyers.
Seller Note Terms. If your deal includes a seller note (which it should, for SBA purposes), specify the amount, interest rate, repayment term, and standby period. For SBA deals, the standard seller note structure is: on standby for 24 months post-close, no payments during that period. After the standby period, the note converts to monthly principal and interest payments.
Working Capital Peg. This is one of the most negotiated and most misunderstood LOI terms. A working capital peg establishes the amount of working capital (current assets minus current liabilities) that the seller must deliver at close. If working capital at close is above or below the peg, the purchase price adjusts accordingly. Setting the peg correctly — based on 12–18 months of trailing average working capital — protects the buyer from receiving a business that has been stripped of cash before close.
Seller Transition Period. Specify the length of time the seller will remain available post-close to support the transition — typically 90 days to 6 months, often with a portion compensated. Be specific about what "transition support" means: full-time for the first 30 days, part-time thereafter, available by phone for 6 months. Vague transition language creates problems.
Non-Compete and Non-Solicitation. Specify the geographic scope, duration (typically 3–5 years), and activities covered by the seller's non-compete. A non-compete that is too narrow (geographic) or too short (duration) creates real re-entry risk. Most sellers will accept a reasonable non-compete; pushback here is sometimes a signal they are planning to start a competing business.
Conditions to Close. List the material conditions that must be satisfied before the deal closes: satisfactory diligence, SBA financing commitment, key employee agreements if applicable, any regulatory approvals. Do not over-specify — every condition is a potential out that also creates uncertainty for the seller.
What to Fight For
First priority: purchase price structure. The allocation between at-close cash, seller note, and any earnout determines your equity requirements and your day-one financial position. Push the seller note to be as large as the SBA will allow while still satisfying the 10% equity injection requirement.
Second priority: exclusivity period length. 90 days minimum. SBA processes take 60–75 days from complete application to loan commitment, and you need buffer for complications.
Third priority: working capital peg methodology. Agree on the calculation method — trailing 12-month average is standard and fair to both parties.
Common LOI Mistakes
Not specifying the seller note structure. If your LOI says "$500K seller note" without specifying the standby period, interest rate, and repayment term, you will relitigate these terms in the purchase agreement — after the seller has already mentally closed the deal at the headline number. Define everything at the LOI stage.
Agreeing to earnouts without clear metrics. Earnouts — contingent payments tied to future business performance — are rarely searcher-friendly. If you must include an earnout, the metric should be revenue-based (not EBITDA, which is too manipulable) and the measurement period should be no longer than 12 months. An earnout that extends past 12 months post-close is effectively a future negotiation — and you will be negotiating from a weaker position as the new owner.
Too-short exclusivity. 45-day exclusivity on an SBA deal is almost impossible. The lender alone will take 30 days to process the initial application. Push for 90 days.
Undefined transition support. "Seller will assist with transition for 90 days" is not a plan. Define the hours, the activities, the compensation, and the expectations for knowledge transfer specifically.
How Mayfaire Row Supports LOI Negotiations
When we are committed to co-investing in a deal, we review LOI drafts before they are submitted. We have seen the terms that cause problems in diligence and at close, and we help searchers identify issues at the LOI stage — when they are cheapest to fix. If you have a deal under consideration and want a second set of eyes on the LOI, reach out before you sign.
*Note: This article is educational and does not constitute legal advice. Engage a qualified M&A attorney to review and negotiate your LOI and purchase agreement.*