Selling your business is one of the most important financial decisions you will ever make.
Before that sale can happen, though, you need to understand a critical step in the process: the LOI.
So, what is an LOI?
And why does it matter so much when preparing to sell your business?
Let’s break it down clearly and simply.
What Is an LOI?
An LOI, short for Letter of Intent, is a non-binding agreement between a buyer and a seller.
It outlines the basic terms of the deal before moving into a binding purchase agreement.
Think of it as a handshake in writing.
It sets expectations.
It clarifies the key terms.
And it ensures both sides are aligned before investing more time, energy, and money into due diligence.
In business sales, an LOI typically includes:
- Purchase price (or a range)
- Payment structure (cash, stock, financing, or a combination)
- Timeline for due diligence
- Closing conditions
- Any exclusivity or confidentiality clauses
But what is an LOI really meant to do?
At its core, it is designed to protect both parties.
For the seller, it filters out casual inquiries from buyers who are not serious.
For the buyer, it provides reassurance that the seller is committed enough to move forward under agreed terms.
Another way to view the LOI is as a roadmap.
Without it, both parties could waste weeks discussing possibilities without direction.
With it, everyone has a clear path forward.
It becomes the bridge between initial interest and the formal purchase agreement.
For sellers, having a strong LOI in place can also set the tone for the negotiation.
If the terms are favorable and well-structured, it positions you for a smoother, more profitable sale process.
In short, when you ask “what is an LOI?” the best answer is this: it is the framework that transforms early buyer interest into a structured, serious step toward selling your business.
Why the LOI Matters in Selling a Business
The LOI is not just paperwork.
It is a signal of intent.
It shows the buyer is serious and ready to move forward.
For the seller, it provides a framework that protects time and resources.
Instead of endless “what if” conversations, you have agreed-upon terms that guide the next steps.
This document also helps identify potential red flags early.
If a buyer’s expectations don’t align with yours, the LOI process makes that clear before the deal drags on.
The LOI also adds structure to what can otherwise feel like a chaotic process.
Negotiations around valuation, payment terms, and timelines are all put in writing.
This clarity reduces misunderstandings and builds trust between both parties.
Another important benefit is exclusivity.
Most LOIs include a clause that prevents the seller from negotiating with other buyers during due diligence.
While this might sound restrictive, it actually helps both sides focus on completing the deal without distractions or wasted effort.
From a financial standpoint, the LOI can also influence the eventual purchase price.
A well-negotiated LOI often locks in favorable terms that carry through to the final agreement.
If you skip this stage or rush it, you risk leaving money on the table later.
Finally, buyers view the LOI as a commitment point.
Once signed, they are more likely to allocate resources, hire advisors, and push forward to closing.
Without it, interest can fade, and opportunities can slip away.
In short, the LOI matters because it protects your time, clarifies expectations, strengthens your negotiating position, and increases the chances of a successful closing.
Preparing Your Business Before the LOI
Knowing what is an LOI is important.
But before you even get there, your business must be in good shape.
Buyers want to see clean financial records, strong systems, and a company that can run smoothly without you.
If your numbers are messy or processes are unclear, negotiations at the LOI stage may stall.
Here are key steps to prepare:
- Organize financial statements.
- Ensure contracts, licenses, and compliance documents are in order.
- Document systems and processes.
- Resolve outstanding legal or tax issues.
The better prepared you are, the stronger your position during LOI negotiations.
Preparation also helps reduce surprises during due diligence.
When buyers dig into your records, they will uncover any inconsistencies or gaps.
If you’ve already cleaned these up, you avoid sudden renegotiations or delays that could derail the deal.
Another important factor is demonstrating stability.
Buyers want to know the business won’t collapse the moment you step away.
This means showing a strong management team, dependable employees, and repeatable revenue streams.
The more confidence they have in the future of your business, the better your LOI terms will be.
It’s also wise to think about presentation.
A well-prepared information package, including summaries of financials, customer data, and growth opportunities , can make your company far more attractive.
Think of it as staging a home before selling.
First impressions count.
In short, preparation gives you leverage.
The cleaner and stronger your business looks before the LOI, the easier it is to negotiate favorable terms and move toward a profitable sale.
Common Misunderstandings About the LOI
Some owners confuse the LOI with the final purchase agreement.
They are not the same.
The LOI is usually non-binding.
It sets the groundwork, but the legally enforceable commitments come later.
Another common misunderstanding is that the LOI guarantees a sale.
It does not.
A buyer can still walk away during due diligence.
But having a signed LOI does mean the buyer is committed enough to invest in the process.
Some sellers also assume that every detail must be finalized in the LOI.
That isn’t true either.
The LOI typically covers only the most important business points, like purchase price, payment structure, and exclusivity.
The fine details are usually addressed in the definitive agreement later on.
Another misconception is that an LOI can’t be negotiated.
Many sellers believe they must accept the first draft presented by a buyer.
In reality, the LOI is often the first opportunity to set the tone and secure favorable terms.
With the right guidance, you can push back and adjust clauses to protect your interests.
Finally, many business owners overlook how the LOI can influence future negotiations.
Even though it’s non-binding, once something is written into an LOI, it can be difficult to change later.
Buyers will often treat it as a reference point during the drafting of the purchase agreement.
That’s why it’s critical not to dismiss the LOI as “just a formality.”
In short, the LOI is not the finish line, it’s the starting block.
Knowing its limits and its influence can help you approach it with the right mindset and avoid costly misunderstandings.
How Elkridge Advisors Helps Sellers With LOIs
At Elkridge Advisors, we work with both business owners and buyers.
That means we know what each side wants from an LOI.
For sellers, we help prepare the business before negotiations even start.
We know the red flags buyers look for and help eliminate them.
When the LOI is presented, we guide you through the details.
We make sure you understand the terms and how they impact the final sale.
Our experience means fewer surprises and smoother deals.
We also help position your business to attract the right kind of buyers.
Not every offer is created equal, and some LOIs are stronger than others.
We analyze the terms, highlight risks, and ensure you are moving forward with buyers who have both the intent and the resources to close.
Another way Elkridge Advisors supports sellers is by using our extensive buyer network.
Because we also represent clients who are actively searching for companies, we often know which buyers are serious, which are simply fishing for information, and which are capable of paying top dollar.
This insight saves sellers from wasted time and poor deals.
Finally, we work to strengthen your negotiating power.
Buyers usually come to the table with advisors, lawyers, and deal experience.
Many sellers don’t.
By having Elkridge Advisors on your side, you level the playing field. We help you navigate exclusivity clauses, timelines, and contingencies so the LOI works in your favor, not against you.
In short, our role is to simplify the process, protect your interests, and make sure the LOI sets you up for maximum value when the deal closes.
The Big Picture: Why LOIs Are a Seller’s Advantage
Many business owners think the LOI only protects the buyer.
That is not true.
A well-structured LOI protects you as the seller too.
It prevents wasted time.
It helps control negotiations.
It gives you the ability to focus only on serious offers.
Most importantly, it shows buyers that you are professional and prepared.
And in business sales, perception matters.
Another advantage of the LOI is clarity.
Once the main terms are written down, there’s less room for misunderstandings.
You know exactly what the buyer expects, and they know what you’re willing to accept.
This eliminates confusion and helps keep the process moving forward.
It also reduces emotional stress.
Selling a business can feel overwhelming, but the LOI creates structure and certainty.
You’re not left guessing what comes next, and you can plan accordingly.
From a financial standpoint, a strong LOI can even create leverage.
When you have multiple interested buyers, having one LOI in hand can encourage others to move quickly and put forward better terms.
It signals that your business is in demand.
Finally, the LOI allows you to maintain momentum.
Deals can lose steam if discussions drag on without commitment.
The LOI locks in intent, keeps timelines clear, and pushes both parties toward a closing date.
In short, when managed properly, the LOI is more than just a formality, it is one of the most powerful tools a seller has to secure a smooth, profitable sale.
Final Thoughts
Selling a business is a complex process, and understanding what is an LOI is only one part of it.
The Letter of Intent sets the foundation for negotiations, but the real outcome depends on preparation, strategy, and execution.
This is where the right advisors make all the difference.
At Elkridge Advisors, we guide business owners through every step, from preparing clean financials and presenting the company attractively, to reviewing LOIs and negotiating terms that protect your interests.
Working with experienced advisors ensures you avoid costly mistakes, reduce stress, and maximize the value of your business.
Buyers will have professionals on their side, you deserve the same.
If you’re considering selling, don’t go through it alone.
With Elkridge Advisors as your partner, you’ll have the confidence, clarity, and expertise needed to achieve the best possible sale.
