If you're selling a business for the first time, the LOI stage is where the deal takes shape and where blind spots are most costly. The headline number gets most of the attention, but the structure around it, how proceeds are paid, when, and under what conditions, often matters more. And while nothing is technically final until closing, core economics that aren't addressed at the LOI stage rarely improve afterward.

Here's what to understand before you sign, and what to look for when the offers start coming in.

What an LOI actually is and where it sits in the process

A Letter of Intent is a document the buyer submits to formally express their interest in purchasing your business. It serves two purposes: acknowledging that both sides intend to move forward, and confirming a mutual good-faith commitment to the negotiation process. In practical terms, it fills the gap between an initial verbal expression of interest and a signed purchase agreement, giving both sides a shared roadmap and timeline to follow through diligence and toward closing.

Think of it as the blueprint for the purchase agreement that follows: specific enough to establish real alignment, but not so detailed that it tries to resolve every legal nuance upfront.

Whether you're running a formal process or in one-on-one conversations with a buyer, you'll reach a point where an LOI lands on your desk. Either way, the goal is the same: make sure the most important terms are negotiated and agreed upon here, so both sides can move forward with confidence.

The fine print on non-binding

Most LOIs are non-binding, meaning neither party is locked into the deal until a definitive purchase agreement is signed. The primary deal terms, things like final purchase price, deal structure, and timeline, are generally not enforceable at the LOI stage. They represent a good-faith agreement to keep negotiating toward a final contract, not a done deal.

That said, certain provisions within the LOI do become legally binding the moment both parties sign. Exclusivity or no-shop clauses, confidentiality obligations, and governing law and dispute resolution terms are the most common examples. Even if the broader document is non-binding, these provisions carry real legal weight from day one.

What to expect in an LOI

The LOI introduces the terms that will shape the rest of the transaction. Some are straightforward. Others have implications that aren't obvious until later in the process. Here are the key terms to understand. 

Introduction 

The LOI begins with a formal introduction stating the names of the parties involved (buyer and seller) and their respective roles.

Transaction overview

The document will then provide a brief overview of the proposed transaction, including the type of transaction (e.g., sale of assets or sale of equity), the purchase price, and any other relevant terms.

Purchase price and payment terms 

This section specifies the purchase price offered by the buyer and the proposed payment terms, including any down payment, installment payments, or financing arrangements.

Most sellers go straight to the headline number, but how and when that price gets paid can matter just as much. 

Payment terms typically include some mix of upfront cash, deferred payments, earnouts, and rollover equity, and each carries a different level of certainty and risk. 

For buyers using outside financing, the LOI should also detail where that financing is coming from, including any documentation or commitments from lenders.

Deal Structure and Funding

The LOI should lay out all proposed deal terms that will later guide the purchase agreement, including where the buyer's funding is coming from. In some cases, buyers will attach letters of support from lenders directly to the LOI as confirmation that financing is in place. In some processes, buyers may also be asked to submit an initial markup of a draft purchase agreement alongside the LOI as part of their final bid package.

The LOI will also specify whether the transaction is structured as a stock sale or an asset sale, and this is rarely a neutral decision. It determines what is actually being sold, how taxes are allocated, and what liabilities each side walks away with.

In a stock sale, the buyer purchases the seller's shares and takes on the entire entity, assets and liabilities included. Sellers tend to prefer this structure because it typically results in more favorable capital gains tax treatment and a cleaner exit.

In an asset sale, the buyer selects which assets to acquire and can leave certain liabilities behind. Buyers often favor this approach because it limits their exposure to historical risks. For sellers, asset sales can trigger higher ordinary income taxes and leave residual liabilities that don't go away at closing.

Working Capital

Working capital represents the funds a business needs to operate day to day. In its most simplest terms, it is your accounts receivable minus your accounts payable.

In the LOI, both parties agree on a working capital target, sometimes called a peg, that the business is expected to meet at closing. After the deal closes, actual working capital is calculated against that target. If it comes in above, the seller may receive additional proceeds. If it comes in below, the seller may owe money back to the buyer.

This can catch first-time sellers off guard. Unclear definitions and assumptions around working capital are one of the most common sources of friction at closing, and once the target is established in the LOI, it is very difficult to revisit.

Assets and liabilities

This section details which assets and liabilities are included in the sale. This may include tangible assets (e.g., equipment, inventory) and intangible assets (e.g., intellectual property, customer contracts), as well as any excluded assets or liabilities.

Due diligence 

The LOI will outlines the due diligence process, including the scope of due diligence investigations to be conducted by the buyer and the timeframe for completion.

Confidentiality and exclusivity 

The LOI includes provisions regarding confidentiality and exclusivity, stating that the parties agree to keep the terms of the LOI confidential and that the seller will not negotiate with other potential buyers for a specified period.

An exclusivity or no-shop clause prevents you from engaging with other buyers for a defined period, typically 30 to 60 days. Unlike most LOI terms, this one is legally binding from the moment both parties sign.

Exclusivity is more common in less competitive processes. In a well-run process with multiple buyers at the table, sellers are in a stronger position to push back on it or negotiate tighter terms. Either way, agreeing to exclusivity too early or for too long shifts leverage to the buyer, particularly if concerns surface during diligence and you no longer have other options in play.

Conditions precedent 

This section specifies any conditions that must be satisfied before the transaction can proceed, such as obtaining financing, regulatory approvals, or the completion of due diligence to the buyer's satisfaction.

Timeline and closing date 

This section sets forth the proposed timeline for completing the transaction, including key milestones and the anticipated closing date.

Governing law and jurisdiction

The LOI should specify the governing law and jurisdiction that will apply to the transaction and any disputes arising from it.

Signatures 

The end of the LOI includes signature blocks for the parties to sign, indicating their agreement to the terms outlined in the LOI.

Heads up: It is also worth noting that LOIs are often negotiated before they are signed. Sellers and their advisors will typically push back on certain terms, and in competitive processes, buyers may feel pressure to improve price or offer more favorable terms to stand out. 

How to compare LOIs

Most first-time sellers treat LOI evaluation like a straightforward ranking exercise, where the biggest number wins. In reality, the goal is to build a complete picture of what each offer actually means for you, then compare those pictures side by side.

What will you actually net? Start by pressure-testing the economics beyond the headline price. Look at how each deal is structured and trace the cash flow: what closes on day one, what's deferred, and what's contingent on things you don't fully control. A lower offer with clean structure and minimal holdbacks can outperform a higher one once you factor in escrow periods, earnout risk, and the tax implications of how proceeds are classified. 

How much confidence do you have in each timeline? Every LOI includes a projected close date, but the more useful question is: what would have to go right for that to happen? Map out each buyer's remaining diligence requirements, any third-party dependencies, and the status of their financing. 

Where does post-close liability land? Once the deal closes, there's still a window during which a buyer can come back to you with claims. Compare how each LOI handles that exposure: what's held in escrow, for how long, and whether reps and warranties insurance is part of the picture. If one buyer is absorbing more of that risk through insurance and another is asking you to hold a larger escrow, that difference should factor into your comparison. 

How will this affect your team? For each buyer, look at what they've committed to around your team: compensation, retention, benefits, leadership roles. These details signal how a buyer actually plans to operate the business after you're gone, which matters whether you're staying on or not. Concrete commitments here distinguish buyers who've thought seriously about the transition from those who are still treating your people as an afterthought.

What this looks like in practice

A deal we worked on recently shows how this plays out. A 30-year-old New York creative agency listed on Baton, drew 14 offers, and narrowed to six finalists:

• Buyer 1: $6.0M: $500K cash at close, $3.7M deferred, $1.2M salary across the transition, healthcare, 5% equity. Back-loaded but rich in ongoing economics.

• Buyer 2: $6.85M: Highest headline. $4.9M cash at close, minimal deferred, but no salary, benefits, or equity for either owner.

• Buyer 3: $5.5M: $3.4M cash at close, salary offered to both owners, but key terms still open.

• Buyer 4: $6.25M: $2.8M cash at close, $1.9M deferred, healthcare included, equity and salary terms unresolved.

• Buyer 5: $6.0M: $3.6M cash at close, lowest combined owner cash flows of any offer, significant terms outstanding.

• Buyer 6: $6.14M: $3.9M cash at close, clean structure, salary offered, no equity or benefits.

By the time it came down to three finalists, the financial differences were real but no longer decisive. The sellers had spent 30 years building something in New York. They wanted it to stay that way. The buyer they chose was local, embedded in the same creative community, and coming in as an owner-operator — not someone who planned to install a management layer and step back.

The offer that pulled ahead comes from Buyer #1. It wasn’t the highest on the table, but when the seller looked at the full structure, salary, equity, benefits, and deferred consideration together, it was the most attractive deal in totality.

Final thoughts

The LOI is a turning point, and the sellers who navigate it best don't go it alone. A coordinated advisory team brings perspective that's nearly impossible to have on your own: M&A advisors to manage buyer dynamics and protect leverage, transaction attorneys to catch binding provisions and structural risk, CPAs to model real after-tax outcomes, and estate planners to make sure the deal aligns with your broader goals.

The earlier that team is in place, the better your position to close.

That's where Baton comes in. We work with sellers throughout this process, helping you understand what you're looking at, who you're dealing with, and how to move forward with confidence. If you're approaching an LOI or just starting to think about a sale, get started today.