What is an LOI? A Founder’s Plain-English Guide

You’ve had conversations with a potential buyer. They seem serious. The numbers have been discussed. And then they say the words that change everything: “We’d like to send you an LOI.”

If you’ve never sold a business before, this moment can be equal parts thrilling and terrifying. I’m Adam Graham, and I’ve been on both sides of this – as the person receiving an LOI and as the person sending one. I’ve also helped countless founders navigate this critical stage of a deal. So let me break it down in plain English.

What is a Letter of Intent?

A Letter of Intent – or LOI – is a formal document from a buyer that says: “We want to buy your business, and here are the terms we’re proposing.”

Think of it as a detailed handshake. It’s not yet a binding contract to buy your company (most of it is explicitly non-binding), but it’s a serious statement of intent that lays out the key commercial terms of the deal.

Once you sign an LOI, you typically enter a period of exclusivity where you stop talking to other buyers while the purchaser conducts due diligence. If everything checks out, the LOI terms become the basis for the final Sale and Purchase Agreement (SPA).

In other words, the LOI sets the direction for the rest of the deal. Get it right, and the rest of the process flows naturally. Get it wrong, and you’ll spend months fighting over things that should have been nailed down at the start.

What’s in a typical LOI?

Every LOI is different, but the core elements are usually the same:

Purchase price. The headline number. This might be a fixed amount, a range, or a formula based on a multiple of earnings. Pay close attention to what metric they’re using – revenue, EBITDA, adjusted EBITDA, net profit. The multiple matters, but what it’s being applied to matters more.

Deal structure. Is it all cash up front? Part cash, part deferred? An earn-out? Equity in the acquiring company? The structure can dramatically change the real value of the deal. £5M up front is very different from £3M now and £2M over three years if you hit certain targets.

Exclusivity period. How long you agree not to talk to other buyers. Typically 60-90 days. Buyers want as long as possible. You want as short as possible while still being realistic.

Due diligence scope. What the buyer plans to examine – financial records, legal contracts, customer data, employee information, IP, technology. This section sets expectations for how invasive the process will be.

Conditions. Things that need to happen before the deal closes – board approval, financing, regulatory clearance, satisfactory due diligence. The more conditions, the more ways the deal can fall apart.

Timeline. The expected path from LOI signing to deal completion. Ambitious timelines keep momentum. Vague timelines let deals drift.

Binding vs non-binding terms. Most of the LOI is non-binding – meaning either party can walk away. But certain clauses are usually binding: exclusivity, confidentiality, and who pays costs if the deal collapses. Read these carefully.

What founders get wrong about LOIs

Having sat through dozens of these, I can tell you the most common mistakes:

Fixating on the headline price. A £10M offer sounds incredible until you realise £4M is an earn-out tied to targets you can’t control because you’ll no longer be running the company. Always look at the structure behind the number.

Signing exclusivity too quickly. The moment you sign, your leverage evaporates. If you have multiple interested parties, the LOI stage is your last opportunity to create competitive tension. Once you’re exclusive with one buyer, you’ve given up your strongest negotiating position.

Ignoring the earn-out terms. If part of the payment is performance-based, you need to understand exactly what triggers it. Who sets the targets? Who controls the budget? What happens if the buyer makes changes to the business that affect your ability to hit those targets? Earn-outs are where deals get ugly – and the LOI is where you establish the ground rules.

Not involving advisors early enough. By the time you receive an LOI, you should already have a corporate finance advisor or M&A lawyer in your corner. They’ve seen hundreds of these. They know which terms are standard and which ones are the buyer trying to gain an advantage. The cost of good advice at this stage is a fraction of the value it protects.

Treating the LOI as a done deal. An LOI is the beginning of the process, not the end. Statistically, a significant percentage of deals that reach LOI stage don’t complete. Due diligence might uncover issues. Financing might fall through. The buyer might simply change their mind. Until the SPA is signed and the money has landed, nothing is certain.

How to negotiate an LOI

The key principle is this: everything is negotiable, but you need to know what matters most to you.

Know your walk-away number. Before you respond to any offer, be clear with yourself about the minimum you’d accept. Not the number you’d love – the number below which you’d rather keep the business. Having this clarity prevents you from getting emotionally pulled into a bad deal.

Negotiate structure, not just price. Sometimes a lower headline price with better structure is worth more. £4M in cash on completion might be better than £5M split across three years with conditions attached. Think about certainty of outcome, not just the biggest possible number.

Push back on exclusivity length. If a buyer wants 120 days of exclusivity, counter with 60. They’ll likely settle at 75-90. Every extra day of exclusivity is a day where you have no alternatives if things go sideways.

Define what “satisfactory due diligence” means. Leaving this vague gives the buyer a free option to walk away for any reason. Try to agree upfront on the scope and the criteria for what would constitute a deal-breaker.

Get break fees considered. If the buyer pulls out for reasons unrelated to what they find in due diligence, should they compensate you for the time and cost? This isn’t always achievable, but it’s worth raising – especially if you’re turning down other opportunities to give them exclusivity.

The timeline: LOI to completion

Here’s roughly what happens after you sign:

Weeks 1-2: Due diligence preparation. You’ll assemble your data room – financial records, contracts, employee details, IP documentation, everything the buyer has asked for. If you’ve prepared this in advance (which every founder should), this stage is straightforward. If you haven’t, it’s a scramble.

Weeks 3-8: Active due diligence. The buyer’s team – accountants, lawyers, technical advisors – will go through everything. Expect questions. Lots of questions. Some will feel intrusive. This is normal.

Weeks 6-10: SPA negotiation. While due diligence is ongoing, the lawyers start drafting the Sale and Purchase Agreement. This is where the LOI terms get turned into legally binding language. Expect every clause to be negotiated.

Weeks 10-12: Completion. Final sign-off, money transfer, handover. Champagne optional but recommended.

Total timeline from LOI to completion: typically 8-16 weeks, depending on deal complexity.

The bottom line

An LOI is one of the most important documents you’ll encounter as a founder selling your business. It’s not the final contract, but it shapes everything that follows. The terms you agree to at LOI stage set the trajectory for the entire deal.

Take it seriously. Get good advice. Negotiate from a position of knowledge, not hope. And remember – the best deals are the ones where both sides feel they got a fair outcome.

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Adam J. Graham is a serial entrepreneur, CEO of JustFix, and creator of Exit Mode – a course that helps founders build businesses worth buying. He has built and sold two companies, led a global public company, and now helps founders scale, systemise, and exit on their terms.

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