When a business owner receives serious interest from a prospective buyer, the conversation may eventually move from general discussions to something more formal: a Letter of Intent, commonly referred to as an LOI.
For many owners, receiving an LOI can feel like a major milestone—and it is. But it is important to understand what the document does, what it does not do, and why its terms deserve careful attention.
An LOI typically outlines the key business points the buyer and seller expect to use as the basis for moving forward. While it is generally not the final purchase agreement, it can establish the framework for negotiations that follow.
That makes it an important stage in the transaction process.
What Is a Letter of Intent?
A Letter of Intent is typically a written document outlining the proposed terms of a potential transaction before the parties invest additional time and resources into due diligence and final agreements.
Depending on the circumstances, an LOI may address items such as:
- Proposed purchase price
- Transaction structure
- Payment terms
- Working capital expectations
- Earnout or seller-financing provisions
- Treatment of certain assets or liabilities
- Expected transition period
- Due diligence requirements
- Confidentiality
- Exclusivity
- Anticipated closing timeline
The level of detail can vary considerably from one transaction to another.
The purpose is generally to determine whether the parties have enough agreement on the major issues to justify moving forward.
Not Everything in an LOI Is Necessarily Nonbinding
Business owners sometimes hear that an LOI is “nonbinding” and assume the document carries little consequence.
That can be an oversimplification.
Many LOIs state that certain business terms are nonbinding until definitive agreements are signed. At the same time, some provisions—such as confidentiality, exclusivity, access to information, or responsibility for certain expenses—may be intended to have binding effect.
That distinction is one reason legal counsel should review an LOI before it is signed.
Owners should understand which provisions express preliminary intent and which may create actual obligations.
Purchase Price Is Only Part of the Story
The headline number naturally gets a lot of attention, but it rarely tells the whole story.
Two offers with the same stated purchase price can produce very different financial outcomes depending on how each transaction is structured.
For example, owners may need to consider:
- How much will be paid at closing?
- Is any portion contingent on future performance?
- Will the seller finance part of the purchase price?
- Is the proposed transaction structured as an asset sale or equity sale?
- How will working capital be addressed?
- Are there holdbacks or escrows?
- What tax consequences may result from the proposed structure?
The economic value of an offer depends on more than the stated price.
Understanding the complete structure can help an owner evaluate whether the proposed terms align with both business and personal objectives.
The LOI Can Shape the Negotiations That Follow
Once an LOI is signed, the parties typically begin more detailed due diligence and work toward definitive agreements.
Although further negotiation may occur, terms included in the LOI can become important reference points.
That is why owners should resist the temptation to treat the LOI as a document that simply needs to be signed quickly so the “real” work can begin.
Some of the most meaningful business terms may already be taking shape.
It may be useful to pause and ask:
- Are the major financial terms clearly understood?
- Are important assumptions documented?
- Does the proposed structure align with my objectives?
- Have potential tax implications been considered?
- Are there terms that could create unnecessary risk?
- Is the transition expectation realistic?
Clarifying these issues early may help reduce misunderstandings later.
Pay Attention to Exclusivity
One provision that deserves particular attention is exclusivity.
A buyer may request a period during which the seller agrees not to negotiate with other prospective buyers while due diligence and negotiations are underway.
From the buyer’s perspective, this can provide confidence that the time and expense invested in the process will not be undermined by a competing offer.
From the seller’s perspective, however, exclusivity can temporarily limit alternatives.
The length of the exclusivity period, the conditions involved, and the buyer’s ability to move efficiently through due diligence may therefore matter.
Legal and transaction advisors can help owners evaluate whether the proposed terms are reasonable under the circumstances.
Use the LOI as a Financial and Tax Checkpoint
The LOI stage can also be an important opportunity to revisit financial and tax considerations before the transaction progresses further.
Once the proposed structure is clearer, owners can work with Pascarella & Gill, PC to evaluate how different components of the proposed transaction may affect the tax and financial picture.
For example, the treatment of purchase price, payment timing, asset allocation, seller financing, or contingent payments may have different implications depending on the structure.
At this stage, close coordination among the CPA, legal counsel, financial advisors, and transaction specialists can help the owner understand how the proposed terms fit together before negotiating final agreements.
The goal is not to predict every eventual outcome. It is to make sure important financial and tax questions are being considered while there is still room to evaluate alternatives.
Preparation Before an LOI Arrives
Owners do not have to wait until an LOI is on the table to begin preparing.
Understanding your priorities in advance can make it easier to evaluate an offer when one arrives.
Consider defining:
- Your financial objectives
- Your preferred transition timeline
- The role you are willing to have after closing
- Which deal terms are most important to you
- Where you may have flexibility
- Which issues would cause you to walk away
This preparation can be valuable even if a sale is not imminent.
A business owner who understands personal goals, financial needs, tax considerations, and business priorities may be better positioned to respond thoughtfully when an unexpected opportunity appears.
Final Thoughts
A Letter of Intent is not the finish line.
It is an important bridge between preliminary discussions and a more detailed transaction process.
The terms outlined in an LOI can influence due diligence, negotiations, tax planning, timing, and the final structure of a transaction. That makes careful review essential.
Business owners should understand not only the proposed purchase price, but also how the transaction is structured, which provisions may be binding, and whether the terms support their broader objectives.
The earlier you address these questions, the more informed your decision-making process can be.
If you are considering a future transition—or simply want to be better prepared if an opportunity arises—contact our office for a confidential discussion.
Wishing you clarity and confidence as you plan your next chapter,
Steve
Stephen Pascarella II, CPA, MST
Principal, Pascarella & Gill, PC
Specializing in Business Exit Strategy & Tax Planning
Click here to learn more about our services.»
This article was written with the aid of artificial intelligence and reviewed for accuracy and clarity.