The letter of intent, explained

A letter of intent is the document that turns a business sale from a conversation into a process with real steps and real consequences. It sits between an initial expression of interest and the definitive purchase agreement, and its job is narrow: record enough of the deal’s shape — price, structure, timeline — that both sides can justify spending real money and real time on due diligence, without either side being locked into terms that have not been tested yet. Buyers and sellers who treat an LOI as a formality, something to sign quickly so the “real” negotiation can start later, misunderstand what the document actually does. A handful of its clauses are drafted to survive even if the deal collapses entirely, and knowing which ones before you sign is what separates a party who understands their own commitment from one who finds out the hard way.

Where the LOI sits in the deal sequence

An LOI typically follows an initial round of informal contact — a teaser reviewed, a confidentiality agreement signed, perhaps a first meeting — and precedes due diligence and the definitive purchase agreement. Signing one is usually the point at which a seller takes the business off the market for a defined period and a buyer commits real professional fees to verifying what they have been told so far. Because of that sequencing, an LOI is generally negotiated faster and with less legal precision than the purchase agreement that follows it, and that is intentional: the parties are agreeing on direction, not finalizing every term, and pushing for purchase-agreement-level detail at the LOI stage usually just slows down a step that is supposed to move quickly.

What the document is built to leave open on purpose

Price, valuation methodology, the exact deal structure and most other commercial terms are conventionally labelled non-binding in an LOI, and that label is doing real work — it lets either side walk away from those specific terms, or revise them, once due diligence turns up something new. A price agreed before diligence is inherently provisional, built on what the seller has represented rather than what has been verified, and a well-drafted LOI says so plainly rather than implying more certainty than actually exists at this stage. A seller should be wary of a buyer who wants the price itself made binding this early in the process — it is rarely a sign of good faith, and it is not how the instrument is meant to work.

The clauses that bind you anyway

A short list of provisions inside an otherwise non-binding LOI is usually drafted to bind both parties regardless of what happens to the deal, and a party who assumes “non-binding” describes the whole document is the one most likely to be surprised later. Confidentiality obligations covering everything exchanged during the process typically survive a collapsed deal. Exclusivity, often called a no-shop clause, commits the seller not to negotiate with other buyers for a stated window, and it is effectively what a buyer is purchasing with their diligence spend at this stage of the process. Cost allocation — the agreement that each side pays its own legal, accounting and advisory fees regardless of outcome — is standard and binding. Occasionally a specific break fee is negotiated for a defined circumstance, though this shows up far less often in small business transactions than in larger ones.

Why courts look past the label on the page

Calling a document “non-binding” at the top does not automatically make every clause inside it non-binding, and this is where a poorly drafted LOI creates real risk for whoever signed it without reading closely. What actually governs a dispute is the substance of each individual provision — its wording, its context, and whether it reads as a genuine commitment regardless of the surrounding disclaimer. An LOI that states its general non-binding intent once at the top, then buries an ambiguous exclusivity or cost clause without specifying whether that particular provision is meant to bind, invites exactly the kind of argument both sides were trying to avoid by using a preliminary document in the first place. The clearest letters of intent state, clause by clause, precisely which provisions bind and which do not, rather than relying on one blanket statement to carry the whole document.

What commonly goes wrong

The most frequent problem is not a dishonest counterparty — it is an LOI signed too quickly, missing the specificity that would have prevented a disagreement later. A due diligence period with no real deadline drifts indefinitely, with neither side quite willing to be the one to call it. An exclusivity window with no clearly defined length leaves a seller unsure when they can legally talk to anyone else about the business. A financing condition described only as “subject to financing,” with no standard specified, gives a buyer an open-ended excuse to walk away and gives a seller almost no way to hold them to the process. A second common problem shows up when verbal assurances made during early conversations — about a key customer relationship staying loyal, or staff continuing on after the sale — never make it into the written document, and later turn out to matter more than either side expected at signing.

What a lawyer should look at before you sign

A lawyer reviewing an LOI is checking for the things a first-time reader often misses: whether the exclusivity period actually protects the side relying on it, whether the conditions precedent are specific enough to be enforceable rather than vague enough to be meaningless, how any deposit is held and under what circumstances it comes back, and whether the binding and non-binding provisions are separated clearly enough to survive a dispute if the deal falls apart. Getting that review done before signing, rather than after a disagreement has already started, is the difference between an LOI that does its job quietly and one that becomes the subject of its own separate argument.