Letter of Intent for Buying a Business: Which Terms Can Bind You?
A nonbinding deal outline can contain binding promises
A letter of intent helps a buyer and seller agree on the framework for a possible acquisition before incurring the full expense of diligence and definitive documents. The parties may call the LOI “nonbinding,” but particular provisions can still be enforceable if the language and applicable law support that result. This is especially important when the document includes exclusivity, confidentiality, expense allocation, or dispute-resolution terms.
Separate commercial expectations from legal commitments
An LOI commonly identifies the proposed purchase price, transaction structure, financing assumptions, due diligence period, closing conditions, and anticipated timetable. Those terms are often intended as a basis for negotiation, not a completed acquisition contract. A well-drafted document should clearly identify which sections are binding and which require a signed definitive agreement. It should also avoid inconsistent language suggesting that the parties have already committed to close.
Exclusivity can carry real consequences
A no-shop clause may prevent the seller from negotiating with other potential buyers for a defined period. The duration, permitted exceptions, termination events, and scope of restricted communications should be explicit. Buyers may need time to investigate the business, while sellers should avoid an indefinite lockup without meaningful progress obligations. Confidentiality and access-to-information provisions deserve similar attention.
Preserve flexibility during diligence
An LOI should not promise that every problem discovered later will be resolved through a price adjustment. The parties may need to walk away if diligence reveals material litigation, contract-consent issues, regulatory obstacles, or unreliable financial information. Financing contingencies and required approvals should be described accurately, without creating an unintended obligation to pursue a deal on unfavorable terms.
Before signing
Counsel should review the LOI before either party begins relying on it. A short preliminary document can shape negotiating leverage, determine who bears expenses, and restrict other opportunities. The objective is to make the binding provisions deliberate while leaving unresolved acquisition terms open for proper diligence and negotiation.
Example: a binding no-shop inside a nonbinding LOI
A seller signs an LOI stating that the proposed $8 million purchase is nonbinding but agrees not to solicit competing bids for 60 days. Even if the buyer never signs a definitive purchase agreement, the exclusivity promise may be independently enforceable under its language and governing law. The parties should specify when the period begins, whether it ends if diligence stalls, and what communications remain permitted.
California drafting considerations
Under California law, enforceability turns on the actual words and circumstances, not merely the heading “letter of intent.” Clearly state which clauses are binding, whether either party must negotiate in good faith, whether the transaction remains subject to definitive documents and approvals, and which remedies apply to breach of the binding provisions. Avoid statements implying that the acquisition itself is already final.
For transaction-specific advice, see our related legal services.
This article is general information, not legal advice. The outcome depends on the facts and applicable law.
