Letter of Intent (LOI) Template for Small Business Acquisitions
Updated June 10, 2025
Disclaimer: Educational purposes only. Not legal advice. Consult qualified legal counsel before signing any LOI.
What Is a Letter of Intent?
A Letter of Intent (LOI) is a preliminary, largely non-binding document that outlines the key terms of a proposed acquisition. It signals serious buyer intent, sets the framework for due diligence, and - critically for search fund entrepreneurs - triggers the exclusivity period during which the seller agrees not to negotiate with other buyers.
While most LOI clauses are non-binding, the exclusivity, confidentiality, and governing law provisions are typically binding. Getting the LOI right sets the tone for the entire deal.
Template: Letter of Intent
Bracketed items [like this] should be replaced with deal-specific information. Clauses marked with an asterisk (*) are typically binding.
1. Parties
This Letter of Intent ("LOI") is entered into as of [Date] by and between:
- Buyer: [Buyer Entity Name or Individual Name], [Address]
- Seller: [Seller Entity Name or Individual Name(s)], [Address]
regarding the proposed acquisition of [Target Company Name] (the "Company"), a [State/Country] [corporation/LLC/partnership] with its principal place of business at [Address].
Guidance: If the buyer is a newly formed acquisition vehicle (common in search fund deals), state the entity name and note that it is being formed for the purpose of the acquisition. In a self-funded search, the buyer is often an individual at the LOI stage with the right to assign to a to-be-formed entity.
2. Purchase Price & Consideration
The total purchase price for 100% of the equity interests / assets of the Company shall be [$ Amount] (the "Purchase Price"), subject to customary adjustments as described below.
Consideration structure:
- Cash at closing: $[Amount]
- Seller note: $[Amount] at [X]% interest over [Y] years, [monthly/quarterly] payments
- Earnout: Up to $[Amount] based on [metric] over [period]
The Purchase Price is based on a [asset / equity] purchase and is calculated as approximately [X.X]x trailing twelve-month adjusted EBITDA of $[Amount].
Guidance: Clearly state whether this is an asset purchase or equity purchase - the tax and liability implications differ significantly. Most small business acquisitions in the US use an asset purchase structure for tax advantages (Section 338(h)(10) election may also be discussed). In the UK and continental Europe, share purchases are more common for SMEs.
The earnout clause, if included, should specify the metric (revenue, EBITDA, or customer retention), the measurement period, and who controls the business during that period. Poorly drafted earnouts are a leading source of post-closing disputes.
3. Financing
The Buyer intends to finance the Purchase Price through the following sources:
- Equity from Buyer and/or investors: $[Amount]
- Senior debt (SBA 7(a) / bank financing): $[Amount]
- Seller financing (as described above): $[Amount]
The Buyer shall use commercially reasonable efforts to secure financing commitments within [30-60] days of the execution of this LOI.
Guidance: Sellers want certainty of close. If you are relying on SBA 7(a) financing, be transparent about the timeline (typically 45-90 days). Traditional search fund acquirers may reference committed investor capital. Self-funded searchers should describe their financing plan clearly.
4. Exclusivity Period *
Upon execution of this LOI, the Seller agrees to negotiate exclusively with the Buyer for a period of [60-90] days (the "Exclusivity Period"). During the Exclusivity Period, the Seller shall not solicit, encourage, or accept any offers, proposals, or inquiries from third parties regarding the sale of the Company or any material portion of its assets.
The Exclusivity Period may be extended by mutual written agreement of the parties.
This clause is binding.
Guidance: 60-90 days is standard for small business acquisitions. Shorter periods (30-45 days) may be necessary in competitive situations. Request enough time to complete due diligence and secure financing. If the deal involves SBA lending, you may need the longer end of the range.
5. Due Diligence
The Buyer shall have a period of [45-60] days from the execution of this LOI to conduct customary due diligence on the Company, including but not limited to:
- Financial statements, tax returns, and working capital analysis
- Customer and vendor contracts
- Employee matters and benefit plans
- Legal and regulatory compliance
- Intellectual property and technology
- Environmental and real estate matters
- Insurance coverage
The Seller shall provide the Buyer and its advisors reasonable access to the Company's books, records, facilities, management, customers, and vendors during normal business hours.
Guidance: The DD period often runs concurrently with (and is shorter than) the exclusivity period. Consider specifying a Quality of Earnings (QoE) analysis as part of financial due diligence - this is now standard practice in search fund acquisitions and many lenders require it.
6. Working Capital
The Purchase Price assumes that the Company will be delivered at closing with a normalized level of net working capital of approximately $[Amount] (the "Target Working Capital"), calculated as current assets minus current liabilities, excluding cash and debt.
The parties shall agree on the specific calculation methodology during due diligence. Any deviation from the Target Working Capital at closing shall result in a dollar-for-dollar adjustment to the Purchase Price.
Guidance: Working capital adjustments are one of the most negotiated items in small business acquisitions. Define clearly what is included and excluded. Use an average of the trailing 12 months to establish the target. This protects the buyer from a seller who drains receivables or delays payables before closing.
7. Representations & Warranties (Preview)
The definitive Purchase Agreement shall contain customary representations and warranties by both the Buyer and the Seller. Seller representations shall include, without limitation:
- Authority and capacity to execute the transaction
- Accuracy of financial statements
- No undisclosed liabilities
- Good standing and compliance with applicable laws
- Title to assets free of liens and encumbrances
- Material contracts and customer relationships
- Tax compliance
- Employee and benefit matters
- Absence of material adverse changes since the latest financial statements
Guidance: The LOI typically previews - but does not finalize - reps and warranties. These will be negotiated in detail in the definitive purchase agreement. Representation and warranty insurance (RWI) is increasingly available for deals above $10M and can facilitate seller-friendly structures.
8. Confidentiality *
Each party agrees to keep confidential all non-public information disclosed during negotiations and due diligence. This obligation shall survive the termination of this LOI for a period of [2] years.
Neither party shall disclose the existence of this LOI or the proposed transaction to any third party without the prior written consent of the other party, except to their respective advisors, lenders, and investors on a need-to-know basis.
This clause is binding.
9. Non-Solicitation of Employees *
During the Exclusivity Period and for a period of [12] months following the termination of this LOI (if the transaction does not close), the Buyer shall not, directly or indirectly, solicit or hire any employee of the Company.
This clause is binding.
10. Conditions to Closing
The closing of the transaction shall be subject to the following conditions:
- Satisfactory completion of due diligence by the Buyer
- Negotiation and execution of a definitive Purchase Agreement
- Securing of financing on terms acceptable to the Buyer
- Receipt of all necessary third-party consents and regulatory approvals
- No material adverse change in the Company's business or financial condition
- Approval by the Buyer's Board of Directors / investors (if applicable)
11. Transition & Seller Involvement
The Seller agrees to provide transition assistance for a period of [3-6] months following closing. The terms of the Seller's continued involvement (consulting agreement, employment agreement, or advisory role) shall be negotiated as part of the definitive agreements.
Guidance: For search fund acquisitions, the transition period is critical. The seller typically knows the business, its customers, and its culture better than anyone. Plan for a structured handover with specific milestones.
12. Governing Law *
This LOI shall be governed by and construed in accordance with the laws of the State of [State], without regard to its conflict of laws provisions.
This clause is binding.
13. Non-Binding Nature
Except for the sections marked as binding (Exclusivity, Confidentiality, Non-Solicitation, and Governing Law), this LOI is an expression of intent only and does not create any binding obligation on either party to consummate the transaction described herein.
14. Timeline
The parties agree to use commercially reasonable efforts to adhere to the following timeline:
- LOI execution: [Date]
- Due diligence completion: [Date, typically 45-60 days after LOI]
- Definitive agreement negotiation: [Date, typically 30-45 days after DD]
- Target closing date: [Date, typically 90-120 days after LOI]
15. Signatures
IN WITNESS WHEREOF, the parties have executed this Letter of Intent as of the date first written above.
BUYER:
Name: [Buyer Name]
Title: [Title]
Date: [Date]
SELLER:
Name: [Seller Name]
Title: [Title]
Date: [Date]
Common LOI Variations by Deal Type
Self-Funded Search
Self-funded searchers typically have more flexibility on deal terms but may need to rely more heavily on seller financing and SBA 7(a) loans. The LOI should clearly state the financing plan and include a financing contingency. Exclusivity periods may be shorter (45-60 days) since the seller wants speed.
Traditional Search Fund
Traditional search fund LOIs often reference committed capital from institutional investors. The buyer may include a provision requiring investor approval. The purchase price multiples tend to be 4-6x EBITDA for companies in the $1-5M EBITDA range, per the Stanford Search Fund Primer.
International Considerations
In the UK, LOIs are sometimes called "Heads of Terms." In France, the equivalent is a "Lettre d'Intention" and French law imposes a duty to negotiate in good faith once an LOI is signed (Article 1112 of the Civil Code). In Germany, the "Letter of Intent" or "Absichtserklärung" has a similar structure but may require notarization if it references share transfers in a GmbH.
Disclaimer: Educational purposes only. Not legal advice. Consult qualified legal counsel before signing any LOI.