A letter of intent is the short document in which a buyer and seller agree the main terms of a sale before the purchase agreement is drafted: price, structure, how the price is paid, working capital, the seller's role after closing, conditions and timing. Most of it is non-binding. The clauses that usually bind are exclusivity, confidentiality, expenses and governing law. For a lender, the LOI is the first document that shows the deal, and a lender reads four things first: the price against the earnings, the seller financing, any earnout, and what the seller does after closing.
- What it is
- A summary of agreed deal terms, signed before the purchase agreement
- Usually non-binding
- Price, structure, payment terms, working capital, conditions
- Usually binding
- Exclusivity, confidentiality, expenses, governing law
- Lenders read first
- Price against earnings, seller note, earnout, seller's role
- In the lender file
- Required for every acquisition, with the target's latest full year of figures
What an LOI does
A letter of intent turns a negotiation into a deal. In a marketed sale it usually follows a looser, earlier indication of interest; in a direct deal it is often the first thing either side signs. It records the terms the parties have agreed in principle, takes the business off the market for a period, and starts the expensive work: due diligence, the purchase agreement, and the financing.
It is also the point where negotiating leverage changes hands. Before the LOI is signed, the seller can still talk to other buyers. After it, the seller has usually agreed to deal only with this buyer, and every week of exclusivity makes the seller more committed to closing. A term the buyer needs, whether a seller note on standby, a working capital peg or a consulting arrangement that fits SBA's rules, is far easier to get into the LOI than to add later. Terms left out of the LOI are argued about in the purchase agreement, where the seller has more reason to dig in.
For the lender, the LOI is the first description of the deal it is being asked to fund. The lender's own terms, first in a term sheet and then in a commitment letter, are written against it.
The terms, and which ones bind
LOIs vary in length, but most cover the same ground. What matters is saying expressly which paragraphs bind and which do not. A loosely written letter can create obligations nobody intended, or fail to create the ones the parties thought they had.
| Term | What it covers | Usually binding? | Why the lender cares |
|---|---|---|---|
| Price | The headline price and what it is based on | No | The loan is sized on earnings, and on SBA loans cannot exceed the independent valuation where one is required |
| Structure | Asset or stock purchase; what is included and excluded | No | Liabilities, licenses, contracts and the collateral the lender will hold |
| Consideration | Cash at closing, seller note, earnout, rollover equity | No | Each changes the equity, the debt service or, on SBA loans, eligibility |
| Working capital | The peg, and whether the deal is cash-free, debt-free | No | Whether the business arrives with enough to operate |
| Seller's role | Transition, consulting or employment after closing | No | SBA limits it; every lender weighs owner-dependence |
| Conditions | Financing, diligence, landlord and customer consents, licenses | No | What the lender must deliver, and by when |
| Exclusivity | The seller will not negotiate with others for a set period | Yes | The window the financing has to fit into |
| Confidentiality | What the buyer may disclose, and to whom | Yes | It must allow the buyer to share the seller's figures with lenders and advisers |
| Expenses and governing law | Who pays what if the deal fails; which state's law applies | Yes | Rarely a lender issue |
The confidentiality clause deserves a second look before signing. A clause that lets the buyer share information only with its own advisers, and not with prospective lenders, forces a pause at exactly the moment the financing should start.
What a lender reads first
An acquisition lender reading an LOI is looking for the terms that decide whether the deal can be financed at all, before it spends time on anything else.
- Price against earnings. The lender sets the price beside the latest full year of earnings and asks whether the debt can be serviced from them. SBA requires debt service coverage of at least 1.15x, and from 1 October 2026 a change of ownership must show 1.25x on historical results. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA. A price well beyond what those tests support needs more equity or more seller financing. See how lenders decide if the price is too high.
- Seller financing. The amount, the rate, when payments start and whether the seller will subordinate. On an SBA loan, a seller note can count for up to half of the required equity injection only if it is on full standby for the life of the loan; a note that is paid counts in debt service instead.
- An earnout. SBA prohibits an earnout to the seller in a change of ownership it finances. An LOI with an earnout has to be restructured before an SBA lender can proceed. Conventional lenders often allow one, subordinated to the loan. See earnouts and acquisition debt.
- The seller's role. In an SBA complete change of ownership the seller may consult for up to 12 months (up to 24 months under SOP 50 10 8.1 from 1 October 2026) but may not stay as owner, officer or employee. An LOI promising the seller a job is an SBA problem. See whether the seller can stay on.
- Rollover equity. A seller keeping any stake makes an SBA deal a partial change of ownership, with different rules and usually a guarantee from the seller.
- Working capital and real estate. Whether the business is delivered with a normal level of working capital, and whether the building is bought or leased and on what terms.
Writing an LOI a lender can finance
A buyer who knows how the deal will be financed can write that financing into the LOI. The specific points:
- State what the price is based on: which year's earnings, and whether they are adjusted. A lender will test the same figures, and a gap between the seller's number and the lender's is easier to resolve if it was visible from the start.
- Spell out the seller note: amount, rate, amortization, and whether the seller will accept full standby or subordination. Sellers who agree to be paid monthly and learn at closing that the note sits behind the bank for years are a deal at risk. See how much seller financing is typical.
- On an SBA deal, bridge a valuation gap with a standby note rather than an earnout. Earnout vs seller note compares the two.
- Agree how the working capital peg will be measured, even if the number comes later.
- Keep the seller's post-closing role within SBA's consulting limits if SBA financing is likely.
- Write a financing contingency that names the structure, not just "subject to financing".
- Allow for the SBA valuation: the loan for the purchase cannot exceed an independent valuation where one is required, so decide in advance what happens if the appraiser comes in below the price.
- Make exclusivity long enough for diligence and financing to finish, with a clear way to extend it.
Buyers who speak to lenders before signing write better letters. See talking to a lender before the LOI.
The LOI in the lender file
On Transparent's checklist, every acquisition needs two things beyond the usual financial statements: the target's latest full year of figures for every company being bought, never an older year, and the letter of intent. The LOI is what turns those figures into a financing request, because it fixes the price, the uses of proceeds and the seller's contribution.
Once the documents are in, Transparent builds the full lender package, financing model, lender presentation, blind teaser and underwriting memo, in a day; built by hand, the same package takes at least a week. The LOI's terms go straight into the sources and uses, the seller note's treatment and the coverage test, so any term that will trouble a lender shows up before the file goes out. The file then goes to the lenders able to finance that structure, from the 278 in the book that write SBA 7(a) and 504 to the 1,148 that write term and private credit. The steps from LOI to closing sets out what follows.
Common questions
- Is a letter of intent legally binding?
- Mostly not. The business terms, price, structure and conditions, are usually non-binding. Exclusivity, confidentiality, expenses and governing law usually are. The letter should say expressly which paragraphs bind.
- Do I need a signed LOI before approaching a lender?
- To be underwritten, yes. A lender needs the LOI to underwrite the deal, and it is on Transparent's acquisition checklist. Talking to lenders before signing is still worthwhile, because it shapes terms the LOI should include.
- How long should exclusivity last?
- Long enough for diligence, the purchase agreement and the financing to finish, with a way to extend it. The right length depends on the deal's complexity, whether a quality of earnings report is needed and how quickly the seller can produce documents.
- Can terms change after the LOI is signed?
- Yes, since the business terms are non-binding. Changes are common when diligence, a quality of earnings report or an SBA valuation finds something the price did not reflect. Changing terms without such a reason costs the buyer credibility with the seller.
- My LOI includes an earnout. Can I still use an SBA loan?
- Not as written. SBA prohibits an earnout to the seller in a change of ownership it finances. The usual fix is to replace it with a seller note, placed on full standby if it is to count toward the equity injection.