The Letter of Intent: What Signing One Actually Commits You To

A document a buyer sends a seller to move a deal forward — the second of three documents in a deal's progression, after the Indication of Interest and before the purchase agreement. It narrows the IOI's price range down to a specific offer price and terms.

Why it matters: Signing an LOI is a bigger commitment than it looks, even though it's mostly non-binding on price and terms. Sellers are typically expected to take the listing off the market once the LOI is signed, then move into due diligence, which can take months — which means an LOI effectively pauses the sale process with one buyer while the seller's business keeps running, employees keep wondering what's happening, and other potential buyers move on. For a Main Street owner, the real risk isn't the paper itself — it's the opportunity cost: months spent exclusively with one buyer who might still walk away during due diligence, after which the seller has to restart the process, sometimes with the market now aware the deal fell through. That's why the terms inside the LOI — price, structure, exclusivity period, and any contingencies — deserve as much scrutiny as the final purchase agreement, even though the document itself isn't fully binding.

Example: A seller signs an LOI at $2.8M with a 60-day exclusivity period and takes the business off the market. During due diligence, the buyer's lender flags a lease assignment issue that takes three extra weeks to resolve, pushing the deal past the original exclusivity window and requiring an extension the seller has to negotiate.

Signing an LOI signals the buyer intends to close at those terms, barring anything that turns up in due diligence. On smaller deals, sellers sometimes skip the LOI entirely and go straight to a purchase agreement backed by an earnest money deposit.

Related terms: Indication of Interest (IOI), Earnest Money Deposit, Due Diligence, Retrade