You found a landscaping company listed at $2.4 million. You screened the listing, the broker sent the CIM, and you ran the salary replacement math. The numbers work. Your SBA lender gave you a preliminary green light. Now the broker wants an LOI.
Most first-time buyers treat the LOI as a formality. They download a template, fill in the price, and send it over. That is a mistake. The LOI is where you define how much you are paying, what you are paying for, how long you have to verify it, and what happens if the deal falls apart. Every material business term starts here.
What an LOI actually does
A letter of intent is a written proposal from buyer to seller that outlines the material terms of a proposed acquisition. Most of it is non-binding. The purchase price, deal structure, due diligence scope, and transition terms are stated as a framework for negotiation, not a contract.
Two provisions are typically binding: the exclusivity clause (preventing the seller from negotiating with other buyers during your diligence period) and the confidentiality clause. Everything else gets formalized in the asset purchase agreement after due diligence.
The LOI matters because it establishes the negotiating framework. Once both sides sign it, the psychology of the deal changes. The seller starts thinking of you as the buyer. The broker stops showing the business. Your lender begins packaging. Changing terms after the LOI is signed is possible, but it creates friction. Terms you accept here tend to stick.
The terms that matter
An LOI for a $1M to $5M SBA-financed acquisition needs to address eight categories. Miss one and you will be renegotiating it during diligence when the seller has less patience and you have more money sunk in the process.
Purchase price and structure
State the total purchase price and how it breaks down. For an SBA deal, the structure typically looks like this: 80% to 90% bank financing via SBA 7(a), 10% to 15% buyer equity injection, and an optional 5% to 10% seller note.
Be specific about what is included. Are you buying the assets of the business or the entity? Asset purchases are standard for SBA deals because they give you a step-up in basis and leave the seller's liabilities behind. The LOI should state this clearly.
If you plan to use a seller note, state the amount, interest rate, term, and standby provisions. SBA lenders require seller notes to be on full standby, meaning no payments for at least 24 months and sometimes longer. If the seller expects monthly payments starting at closing, that will not work with SBA financing. Better to address it now than in week six of diligence.
The seller note reduces the buyer's cash requirement from $360K to $240K while keeping the SBA lender comfortable with the 10% true equity injection.
Financing contingency
The LOI must condition closing on your ability to obtain SBA financing on acceptable terms. This is non-negotiable. Without a financing contingency, you are legally committing to close a deal you may not be able to fund.
State it plainly: the transaction is contingent upon the buyer obtaining SBA 7(a) financing sufficient to fund the acquisition. If the loan is not approved within the specified timeframe, the LOI terminates and the deposit is returned. Brokers sometimes push back on this language. Hold firm. Any broker who has closed SBA deals understands why it is necessary.
Due diligence period and scope
Request 45 to 60 days from LOI execution for due diligence. This gives you enough time to complete a quality of earnings report, environmental review if applicable, lease review, and operational assessment.
The LOI should specify what you will have access to: three years of tax returns, monthly P&L statements, general ledger detail, bank statements, customer lists and contracts, employee records, equipment lists, and any pending or threatened litigation. State that the seller will make themselves and their key employees available for interviews during reasonable business hours.
Include a termination right. If due diligence reveals material issues not disclosed in the CIM, you can walk away with your deposit returned. This is standard and any reasonable seller expects it.
Exclusivity
The exclusivity period prevents the seller from soliciting or entertaining other offers while you are spending time and money on diligence. Typical range is 60 to 90 days, though it should align with your due diligence timeline plus enough buffer for the SBA loan to reach commitment.
Be aware that exclusivity has a cost. The seller is taking their business off the market for you. If your diligence drags or your lender is slow, the seller loses time. Some sellers build in milestones: if the buyer has not submitted a loan application within 30 days, exclusivity terminates. This is fair. It keeps both sides accountable.
Working capital
The working capital provision is the term most first-time buyers overlook and most often regret. It defines how much operating cash and receivables the seller delivers at closing, net of current liabilities.
The standard approach is a working capital peg: you agree on a target level of net working capital based on a trailing 12-month average. If the seller delivers more than the peg at closing, the purchase price adjusts upward. If less, it adjusts downward, dollar for dollar.
Without this provision, the seller has an incentive to strip the business before closing. Collect all receivables aggressively, defer vendor payments, draw down cash. You arrive on day one with no operating cushion and immediate bills to pay. The working capital peg prevents this.
You do not need to specify the exact peg amount in the LOI. State the methodology: net working capital at closing will be based on the trailing 12-month average, as verified during due diligence, with a dollar-for-dollar purchase price adjustment at closing. The exact number gets set after your QoE report determines what normal working capital actually looks like.
Training and transition
Specify the seller's post-closing obligations. For a service business, you typically need the seller available for 60 to 90 days after closing to introduce you to key customers, transfer vendor relationships, train you on operational systems, and help manage the employee transition.
Define whether this is full-time or part-time, on-site or available by phone, and whether the seller is compensated separately or whether the transition period is included in the purchase price. Most SBA deals build the transition into the price, with no additional compensation beyond the seller note.
Non-compete agreement
SBA lenders require the seller to sign a non-compete as a condition of the loan. The LOI should state this upfront. Typical terms for a local service business: 3 to 5 years, within a defined geographic radius (usually 25 to 50 miles), covering the same or similar services.
If the seller has a spouse or family member involved in the business, the non-compete should cover them as well. This is not aggressive. It is what your lender will require, and addressing it in the LOI avoids a confrontation during closing when everyone is fatigued.
Lease assignment
If the business operates from a leased location, the LOI should condition closing on the buyer obtaining an acceptable lease assignment or new lease on terms satisfactory to the SBA lender. SBA typically requires at least 10 years of remaining lease term, including renewal options.
If the seller owns the property, you are negotiating a lease in addition to the business purchase. State in the LOI that the parties will negotiate a market-rate lease as part of the transaction, with terms acceptable to the SBA lender. Related-party leases are one of the most common sticking points in SBA deals. Define the framework early.
What to negotiate hard and where to be flexible
First-time buyers tend to either over-negotiate every point (exhausting the seller and broker) or accept everything as presented (leaving money and protection on the table). Neither approach works.
Negotiate hard on the working capital peg. This directly affects how much cash you have on day one. A poorly defined or missing working capital provision can cost you $30,000 to $80,000 in a $2M to $3M deal. Get the methodology agreed upon in the LOI.
Negotiate hard on the due diligence period. You need enough time to complete a thorough QoE, review the lease, and get your SBA loan to commitment. Accepting 30 days on a deal that requires SBA financing is setting yourself up for a rushed process and missed red flags.
Negotiate hard on the financing contingency. This protects your deposit if the SBA loan falls through. Sellers sometimes resist broad contingencies. The compromise is specificity: condition on SBA 7(a) financing at a rate not to exceed X%, rather than an open-ended financing contingency that lets you walk for any reason.
Be flexible on price, within reason. If the business is priced at a fair multiple and the salary replacement math works, fighting over $25,000 on a $2.4 million deal can cost you the deal entirely. The seller and broker will remember how the negotiation felt. If you nickeled them on price, they will be less cooperative during diligence.
Be flexible on transition timeline. If the seller wants a shorter transition period, consider whether you can supplement with a consulting agreement. If they want a longer overlap, that might actually work in your favor. Transition terms are usually low-cost concessions that build goodwill.
Mistakes first-time buyers make
Signing the LOI in their personal name. If you plan to close through an LLC (and you should), the LOI should be executed by the entity that will close the deal. Signing personally and then assigning to an LLC later creates unnecessary confusion with the seller, the lender, and potentially your own legal exposure.
Omitting the working capital provision. A downloaded LOI template rarely includes a working capital mechanism. Without it, the seller can strip receivables and defer payables before closing. You discover the gap when you show up on day one and the operating account is empty.
Accepting a short exclusivity period without a financing extension. SBA loans take 45 to 75 days to close after the full package is submitted. If your exclusivity expires before the loan commits, the seller can reopen the process and you have spent $15,000 to $25,000 on diligence with no protection. Build in an automatic extension if the loan is in active underwriting.
Failing to address the lease. The business is worth nothing if you cannot operate it from the current location. If the lease is expiring, if the landlord is difficult, or if the rent is below market because the seller owns the building, these issues need to be identified in the LOI. Discovering a lease problem in week five of diligence, with $20,000 in sunk costs, is an expensive way to learn this lesson.
Treating the LOI as a legal document instead of a business document. Some buyers send the LOI to their attorney first and receive back a 15-page document that reads like a purchase agreement. This kills deals. The seller's broker sees a document full of legal provisos and concludes you are going to be difficult through the entire process. Keep the LOI to 3 to 5 pages. Use plain language. Save the legal detail for the APA.
Have your attorney review the LOI before you send it. But write it yourself in straightforward terms, then let the attorney mark up specific language. An LOI that reads like a business proposal from a serious buyer gets a better response than one that reads like a litigation document.
SBA-specific requirements to address early
Several LOI terms interact directly with SBA lending requirements. If your LOI contradicts what the lender needs, you will renegotiate these terms during loan packaging, which delays the deal and frustrates the seller.
Equity injection. SBA requires a minimum 10% equity injection from the buyer. This must be true equity, meaning cash, rollover retirement funds (ROBS), or a gift. Seller notes do not count toward the equity injection. If your deal structure assumes the seller note covers part of the 10%, it will not pass underwriting. Structure the LOI so the buyer's equity injection is clearly separate from any seller financing.
Seller note standby. If the deal includes a seller note, SBA requires it to be on full standby for at least 24 months. Some lenders require longer. Full standby means no principal or interest payments during the standby period. If your LOI promises the seller monthly payments starting at closing, your lender will reject the structure. Address this in the LOI before the seller builds those payments into their financial plan.
Change of ownership. SBA requires that the buyer own at least 51% of the acquired business. If you are buying with a partner, the individual who will operate the business daily must hold the controlling interest. State the ownership structure in the LOI so your lender can confirm eligibility early.
The personal guarantee. SBA requires an unlimited personal guarantee from any individual owning 20% or more of the acquiring entity. If the seller retains any ownership post-closing (an earnout structure, for example), they may also need to guarantee the loan for the first two years. These are lender requirements, not negotiable terms. Flagging them in the LOI avoids surprises.
After the LOI is signed
A signed LOI starts the clock. You typically have 45 to 60 days of exclusivity, during which you need to complete due diligence, engage a QoE provider, submit your full SBA loan package, and negotiate the asset purchase agreement.
The LOI is not a contract to buy the business. It is a mutual agreement that both sides are serious enough to invest time and money in the process. But the terms you set here define the rails the deal runs on. A well-constructed LOI gives you room to verify the numbers, negotiate from findings, and walk away if the business is not what it appeared to be. A sloppy one locks you into a framework that may not protect you when it matters.
Write it carefully. Have it reviewed. Send it with confidence.