Letter of Intent

A letter of intent, often called an LOI, is a document that sets out a proposed acquisition so a buyer and seller can discuss what the buyer intends to pursue.

Why a letter of intent matters to people buying a small business

A proposal that misstates the buyer's intentions can wreck trust. A podcast guest warns against winning an LOI with terms you already plan to renegotiate. The cost goes beyond the deal: the buyer may later need the seller's help to understand the business.

An honest proposal gives the seller a clear account of what the buyer intends. It doesn't remove uncertainty. New information can change a buyer's view; that is different from hiding a planned change at the start.

Before moving toward an LOI, revisit the acquisition search criteria template. Can you explain the work you'd take on and why it fits? Enthusiasm for owning a business doesn't answer that.

How a letter of intent is used

Say a buyer wants to acquire a business but still doesn't know who handles its daily customer work. An early lender conversation sounded encouraging. The buyer is tempted to present the purchase as ready to go, though operating fit and financing are both still open.

A straighter account separates what the buyer intends from what isn't confirmed. The buyer can name the open operating question and describe the lender conversation accurately, without calling it a commitment. The seller gets a more useful picture.

An SBA lender reviews potential deals with searchers before they submit an LOI, to test the financing logic and the fit with the lender's team. That feedback can sharpen a buyer's thinking. It is not a financing commitment. See business acquisition financing to prepare questions for that conversation.

Common mistakes around a letter of intent

Don't assume the seller's agreement means a lender has approved the purchase. Keep the two conversations separate, and ask the lender what its feedback does and doesn't mean.

Don't infer whether the document binds you from its title or a general definition. Have counsel explain the actual draft before you rely on it.

Don't hide uncertainty. If new information changes your intentions, explain why, so the seller doesn't conclude the original proposal was misleading.

Related terms

A confidential information memorandum presents information about a business for sale. A seller note involves a continuing repayment obligation.

Source notes

Guest remarks come from interviews on The SMB Investor podcast and are paraphrased; examples are our own.