Letter of Intent to Buy a Small Business: Template and the Five Terms Owners Actually Negotiate
The letter of intent is the document that turns a good conversation with an owner into a deal. Everything before it, the first letter, the phone call, the coffee meeting, the financials shared under an NDA, is courtship. The LOI is where you both write down a price and a structure and agree to spend the next two or three months trying to close on those terms. If you found the business off-market through your own outreach (our guide on how to approach a business owner about buying covers that stage), the LOI is usually the first formal document in the entire relationship, so how you draft it sets the tone for everything after.
One thing up front: this article is a practical outline written by a deal-sourcing company, and it is not legal advice. Have a lawyer who does small business M&A review your LOI before you send it. That review costs far less than one mistake in the exclusivity or non-compete language.
What an LOI is for
An LOI does two jobs. It locks the headline economics so neither side wastes months of diligence on a deal that was never agreed, and it buys you exclusivity, a window where the owner agrees to stop talking to other buyers while you do the work. Law firm guidance puts the standard exclusivity window at 60 to 120 days, with a diligence period of 30 to 90 days sitting inside it. Most business acquisitions close 60 to 120 days after the LOI is signed.
Almost everything else in the letter is deliberately loose. The LOI is short and defers the hard drafting to the purchase agreement. That looseness is a feature. You want the owner to sign it quickly, and owners sign short documents.
A plain-English LOI outline
Here is the skeleton most small business LOIs follow. Use it as a checklist for what your lawyer's draft should cover. It does not replace that draft.
LETTER OF INTENT: [Buyer] / [Target Company]
1. Parties and the business
Who is buying, who is selling, and a one-line description
of the business and its location.
2. Purchase price and structure
The headline number, whether it is an asset or stock purchase,
and how the price is paid: cash at close, seller note, any
earnout or forgivable component.
3. Financing
How the buyer intends to fund the deal (e.g. SBA 7(a) loan
plus equity injection plus seller note) and whether closing
is conditioned on that financing.
4. Working capital
A statement that the business will be delivered with a normal
level of working capital, with the target (the "peg") to be
set from the trailing twelve months during diligence.
5. Due diligence
The diligence period, what the seller will provide (financials,
tax returns, contracts, licenses), and buyer's right to walk
if diligence is unsatisfactory.
6. Exclusivity (BINDING)
The no-shop: seller will not solicit or negotiate with other
buyers for [60-90] days.
7. Confidentiality (BINDING)
Both sides keep the discussions and shared information private.
8. Transition and non-compete
Expected seller transition support after close, and the intent
to sign a non-compete at closing.
9. Conditions to closing
Financing approval, license transfers, landlord consent,
no material adverse change.
10. Non-binding statement
Except for the sections marked binding, this letter is an
expression of intent only and creates no obligation to close.
11. Expiration
The offer expires if not signed by [date].
That last section matters more than it looks. Put a short signing deadline on the letter. An open-ended LOI becomes a free option the owner can shop.
The five terms owners actually negotiate
In practice, small business sellers skim most of the letter and argue about five things.
1. Price and structure
The number gets the attention, but structure moves as much value as price does. An asset purchase (the norm in small deals) gives the buyer a stepped-up basis and leaves historical liabilities behind, while a stock purchase is simpler for licenses and contracts but inherits the company's past. Owners also care about their tax outcome, so a slightly lower price with better structure often beats a higher one. State the structure explicitly in the LOI. This is a fight you want at the letter stage, when it costs a phone call instead of a legal bill.
2. The seller note and its standby terms
Most small deals include seller financing, typically a promissory note for part of the price paid over several years. The note does real work: it bridges valuation gaps and it keeps the seller invested in a clean handover. Sellers expect a note. The argument is over its standby terms.
If you're using SBA financing, the current SBA rulebook (SOP 50 10 8, effective June 1, 2025) counts a seller note toward your required equity injection only when the note sits on full standby for the life of the SBA loan, and only up to half of the required injection. Full standby means zero payments of principal and zero payments of interest for the whole term, and most 7(a) acquisition loans run ten years. Sellers hate it, understandably. Ten years is a long time to wait to be paid. So say in the LOI which portion of the note, if any, will be on standby, and confirm your lender's read before you send it. A seller who discovers standby terms at the purchase agreement stage feels ambushed, and ambushed sellers retrade.
3. The working capital peg
The peg is the amount of working capital (receivables plus inventory minus payables, roughly) the business must have at closing, with the price adjusted up or down against that target. First-time sellers are often surprised it exists at all. They think of the price as the price, then learn the business must also come with enough working capital to operate.
Handle this in the LOI with one honest sentence: the business will be delivered with a normalized level of working capital, set during diligence from the trailing twelve months. Naming the mechanism early heads off one of the uglier late-stage blowups in small deals. If cash and debt are excluded (the usual "cash-free, debt-free" convention), say that too.
4. The exclusivity period
Exclusivity is the term you need most and the one the seller gives up most reluctantly, since it takes their business off the market with no guarantee you close. The law firm norm is 60 to 120 days. For an SBA-financed deal, be honest about the timeline: a 90-day window with an automatic 30-day extension if the loan is in underwriting is a reasonable ask. Offer something in exchange for a longer window, like proof of your equity funds or a lender prequalification letter. And mark the exclusivity clause binding, in writing, because it is the part of the letter you may actually need to enforce.
5. Transition and the non-compete
The LOI should state how long the seller stays on after close and on what basis, whether that's 90 days of included transition help or a year of paid consulting. It should also state the intent to sign a non-compete at closing, with geography and duration left to the purchase agreement. Owners negotiate this term emotionally as much as economically. A seller who built the business over 30 years reads a wide non-compete as being told to disappear. Scope it to the trade area the business serves and the customers it has, for a defined number of years.
What's binding and what isn't
The standard architecture, consistent across law firm guidance: deal terms are non-binding, process terms are binding. Non-binding covers price, structure, representations, and closing conditions. Binding covers confidentiality, exclusivity, expense allocation, governing law, and the clause that says which sections are which. Label every section explicitly. An unlabeled letter is a gray area that favors whoever didn't draft it, which is the main reason the lawyer review is worth it even on a two-page letter.
How the LOI connects to your SBA loan
For most individual buyers the LOI is also the document that starts the financing clock. SBA 7(a) loans go up to $5 million and explicitly cover complete or partial changes of ownership, and a signed LOI is what most lenders want before they open underwriting on a specific deal. Terms in the letter feed straight into the loan file. The price sets the 10% minimum equity injection that a complete change of ownership requires under SOP 50 10 8. The seller note standby language is covered above. And the financing condition should say that closing depends on loan approval, so an underwriting delay never squeezes you contractually. Our guide to using an SBA 7(a) loan to buy a business walks through the full underwriting sequence, DSCR math included.
After the signature
A signed LOI opens the diligence window, and the clock runs from day one. Work through our off-market due diligence checklist in the first week, starting with the public-records portion you can verify without waiting on the seller: SBA loan history and registry filings. If you're still upstream of all this and don't yet have an owner conversation going, that's the part Scouly automates. Build an acquisition thesis for free and it ranks off-market companies in your market by SBA loan maturity, registry longevity and local fragmentation, so the LOI you eventually draft is for a business you chose on purpose.
Frequently asked questions
Is a letter of intent to buy a business legally binding? Mostly no, partly yes. The deal terms (price, structure, closing conditions) are typically non-binding expressions of intent. The process terms (confidentiality, exclusivity, expense allocation, governing law) are typically binding. A well-drafted LOI labels each section explicitly, because an unlabeled letter can be read by a court as an enforceable agreement neither side intended.
How long should exclusivity last in a small business LOI? Law firm guidance puts the normal range at 60 to 120 days. For an SBA-financed purchase, 90 days is a realistic ask given underwriting timelines, and an automatic extension while the loan is in underwriting protects you from losing the deal to a delay you don't control. Expect the seller to resist anything longer without evidence you can close.
What is a working capital peg? It's the target level of working capital the business must have at closing, usually set from the trailing twelve months, with the purchase price adjusted against it. The peg stops a seller from draining receivables and inventory before close. Sellers new to the process often haven't heard of it, so name the mechanism in the LOI rather than springing it at the purchase agreement.
Can a seller note count toward my SBA equity injection? Only under strict conditions. Under SOP 50 10 8, effective June 1, 2025, the note must be on full standby for the life of the SBA loan, and it can supply at most half of the required injection. Full standby means no principal and no interest paid to the seller for the whole term, which on most 7(a) acquisition loans runs ten years. For a complete change of ownership the minimum injection is 10% of total project costs.
Do I need a lawyer for a letter of intent? Yes, even though the LOI is short and mostly non-binding. The binding provisions (exclusivity, confidentiality) are real contracts you may need to enforce, and sloppy drafting can make the whole letter enforceable. A small business M&A attorney can draft or review a short LOI quickly, and the cost is small against the price of the deal.
How long after the LOI does a deal close? Law firm guidance says most business acquisitions close 60 to 120 days after the LOI is signed. Diligence typically takes 30 to 90 days of that window, running in parallel with lender underwriting on financed deals. License transfers, landlord consents and SBA approval are the usual sources of delay, so surface all of them in the LOI's closing conditions.