Is a letter of intent binding?

Which parts are usually binding, and which are not?

A well-drafted LOI says plainly which sections bind the parties. The common split:

Usually non-binding:

• Purchase price and how it is paid: cash, SBA loan, seller note, rollover equity.
• Asset or stock purchase.
• What is included: inventory, receivables, working capital.
• Seller transition, non-compete and employment terms.
• Closing date and conditions, including financing and diligence.

Usually binding:

• Exclusivity, or "no-shop." The seller agrees not to market the business or negotiate with others for a set period.
• Confidentiality. Often by reference to the NDA already signed.
• Expenses. Each side pays its own costs, unless the LOI says otherwise.
• Access. The seller agrees to give reasonable access for diligence.
• Governing law and termination. Which state's law applies, and when the binding parts end.
• The non-binding statement itself. A clause saying no party is obligated to complete the deal until a definitive agreement is signed.

How can an LOI become binding by accident?

This is where state law matters, so treat the following as general concepts to raise with your lawyer.

• No clear non-binding statement. If the LOI does not say which parts are non-binding, a court may look at the whole document and conclude the parties intended a deal.
• All essential terms agreed. An LOI that settles price, structure, assets and closing date, with nothing left to negotiate, looks more like a contract.
• Conduct. Acting as if the deal is done, such as announcing it or starting to operate the business, can be used as evidence of intent.
• Good faith. Some courts read a duty to negotiate in good faith into an LOI, especially when it says so. That does not force you to close. It may limit walking away for reasons unrelated to the deal.
• Labels. Calling the document an "agreement" or using "shall" throughout does not settle it, but it does not help.

What does exclusivity commit each side to?

The seller stops talking to other buyers. You get time to do diligence and arrange financing. LOI exclusivity typically runs 30 to 90 days, while SBA deals typically take 60 to 120 days from LOI to closing. Those ranges do not always line up.

Some LOIs also commit the buyer to proceed diligently or to provide proof of financing by a date. Read those sections as carefully as the seller's.

Worked example: the exclusivity gap and the money at risk

1. Your LOI gives 45 days of exclusivity. Your lender says closing typically takes 90 days. For the last 45 days, the seller is free to talk to other buyers.
2. Diligence costs mostly fall inside that window. A survey of deal costs, with a median deal of about $4 million, found median legal fees of $28,500 and a median QoE of $40,000: $68,500 together.
3. If the seller walks in week 8, after the QoE and a first draft of the purchase agreement, much of that $68,500 is spent and not recoverable under a standard "each side pays its own costs" clause.
4. The fixes: match exclusivity to the lender's realistic timeline, add an automatic extension while the lender is processing, and ask for expense reimbursement if the seller walks without cause. Sellers may refuse the last one, but it is a fair request when the lender requires a QoE.

How does an SBA lender view the LOI?

An LOI is not a loan commitment. The lender needs a signed LOI or purchase agreement to start underwriting, and issues its own commitment letter later. Until then, your financing is not certain, which is why the LOI should make closing conditional on SBA loan approval and on an independent valuation that supports the price. Under current SBA rules, total debt is capped at the appraised value, and any gap must come from your cash.

Make sure the LOI's non-binding terms fit SBA rules. Seller earnouts are prohibited in SBA-financed acquisitions, and seller debt not on full standby is included in debt coverage. An LOI that promises the seller something the lender cannot approve has to be renegotiated later.

Where these numbers come from: Exclusivity and LOI-to-close periods from Big Ideas DB on letters of intent and BizBuySell's SBA loan timeline. Deal cost figures from the Big Deal Small Business deal cost survey. SBA rules from this guide to SBA SOP 50 10 8.1. Nothing here is legal advice; confirm with counsel in your state. SOP 50 10 8.1 applies to loans that receive an SBA loan number on or after October 1, 2026 (SBA Information Notice 5000-880695).

Related questions

Does signing an LOI obligate me to buy the business?

Usually not, if the LOI clearly says the deal terms are non-binding. You remain bound by the binding sections, such as confidentiality. Confirm with your lawyer before you sign.

Can the seller back out after signing?

Usually yes, on the non-binding terms. During exclusivity, though, the seller generally cannot negotiate with other buyers. If they do, your remedy depends on the LOI's wording and state law.

Should I put down a deposit with the LOI?

It is not universal in small-business deals. If you do, the LOI should say when it is refundable. Make it refundable if diligence or financing fails.

Do I need a lawyer for the LOI, or only for the purchase agreement?

Use one for both. A lawyer's review of the LOI costs far less than an exclusivity or good-faith dispute, and it is the cheapest point to fix SBA-related terms.

What comes next

Knowing which parts bind you, the next question is what to put in them: what should a letter of intent to buy a business include?

Related articles

• What should a letter of intent to buy a business include?
• What happens after you sign a letter of intent?
• Should you offer the asking price in your letter of intent?
• What do lawyers and accountants cost when you buy a business?
• How long does an SBA acquisition loan take to close?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.