Letter of Intent to Buy a Business in 2026: The Buyer’s LOI Playbook and Sample Terms

The letter of intent to buy a business in 2026 is the buyer’s most important pre-diligence document because it sets the entire deal-shape: price basis (TTM EBITDA vs LTM EBITDA), exclusivity period (60-90 days typical), working capital peg methodology, R&W insurance carrier, escrow size, MAC definition, and closing conditions. Sample LOI structure works through a $3.5M EBITDA HVAC deal at 7x price ($24.5M), 20% rollover equity, 8% escrow, 90-day exclusivity. Details in the LOI shape everything downstream.

A letter of intent to buy a business is the document where the deal is actually won. Sellers and their bankers run side by side comparisons: price, financing certainty, escrow size, exclusivity length, working capital mechanic, earnest deposit. The highest headline rarely wins. The most credible LOI at a fair price wins.

This 2026 buyer playbook covers what an LOI is, binding vs non-binding provisions, price and earnout structure, exclusivity, breakup fees, the working capital peg, R&W treatment, escrow and indemnification, the MAC clause, conditions precedent, due diligence carve-outs, common mistakes, and a clean sample LOI. Worked example: a $3.5M EBITDA HVAC business with concrete terms. Sources cited throughout. Seller-side companion: letter of intent (LOI) business sale 2026.

“The seller is not just reading your number. They are reading whether you can actually close. A clean, credible LOI at a fair price beats a higher LOI from a buyer the seller does not trust.”

Key Takeaways

• Sellers compare LOIs on price plus certainty. Higher price loses if the buyer looks unreliable.
• State a clear price, not a range.
• Name financing with evidence: equity commitment letter, lender term sheet, or cash on balance sheet.
• 60 to 90 days exclusivity is the 2026 norm.
• Escrow 6 to 8 percent of price, 12 to 18 month survival on general reps, is the current PE buyer default (drops to 0.5 to 1 percent with RWI).
• The working capital peg, MAC clause, and indemnification cap deserve real attention even in a non-binding LOI.

What is a letter of intent to buy a business

The LOI is the buyer’s proposal in writing. It states price, structure (asset or stock deal), consideration mix (cash, rollover, seller note, earnout), financing, conditions to closing, diligence scope, exclusivity period, earnest money, and the deadline to sign a definitive purchase agreement. Most of it is non-binding. The seller signs to grant exclusivity and lock in the process, not to commit to the price.

The LOI does three jobs. It aligns the parties on economic terms in principle, grants the buyer breathing room to spend on diligence without being shopped, and sets a calendar both sides live by. Vague LOIs become re-trades.

LOI vs term sheet vs IOI. “Letter of intent” and “term sheet” are mostly interchangeable in lower middle market M&A. An “indication of interest” (IOI) is one step earlier, typically a non-binding price range submitted before management meetings. The IOI gets the buyer into the second round; the LOI gets the buyer into exclusivity.

Binding vs non-binding provisions in an LOI business purchase

Most of the LOI is non-binding. Price, structure, escrow size, indemnification caps, working capital target, even the earnout formula: all subject to the definitive agreement. Non-binding does not mean meaningless. It means the parties are aligned in principle and the lawyers paper the deal.

Four sections are typically binding. Exclusivity (no shop), confidentiality (including the existence of the LOI), expense allocation, and earnest money / deposit. These four protect the seller from being used as a stalking horse, protect both sides from leaks, and protect the deposit from being kept on a soft termination. Lawyers spend most of their LOI review time on these clauses.

State binding vs non-binding explicitly. “Except for Sections X, Y, and Z, this letter is non-binding and intended only to outline the principal terms of a potential transaction.” That sentence saves arguments later.

Purchase price and earnout structure in an LOI business purchase

State a single price number. “$10 million” beats “$8 to $12 million” every time. A range anchors the seller to the floor.

Specify the basis: cash-free, debt-free, with a normalized working capital target. “$10 million, cash-free, debt-free, with a normalized net working capital target of $1.2 million” is precise. “$10 million” alone is ambiguous and invites post-LOI fights about whether cash stays or gets swept at close.

Quantify the consideration mix. “$10M total: $8M cash at close, $1M seller note (5 year, 7 percent, amortizing), $1M earnout over 24 months tied to revenue retention.” Sellers strongly prefer cash, so a higher all-cash number often beats a higher headline with deferred consideration.

Earnouts: write the formula in the LOI, not “to be negotiated.” State the metric (revenue, gross profit, EBITDA, customer retention), the measurement period, the payment trigger, and the cap. Use revenue-based earnouts where possible. EBITDA-based earnouts invite accounting disputes between buyer and seller. See our walkthrough on earnouts and when they backfire.

Exclusivity period: 60 to 90 days is the 2026 norm

The 2026 PE buyer default is 60 to 90 days of exclusivity. Long enough to complete financial, tax, legal, commercial, and operational diligence, finalize financing, and negotiate the definitive agreement. Practical Law’s 2025 M&A Deal Trends report and the American Bar Association’s 2025 Private Target Deal Points Study both confirm 60 to 90 days as the dominant range for lower-middle-market deals.

Match length to complexity. A clean asset deal on a $5M EBITDA business can close in 60 days. A stock deal with multi-state licenses, environmental review, and tax-deferred rollover needs 90 days. Asking for 120+ days reads as a buyer who is not ready, or one using exclusivity to keep the seller off the market while shopping other deals.

Build in a one-time mutual extension. “60 days, extendable by 30 days by mutual written consent” is reasonable. Automatic extensions are not. Asking for less than 45 days usually backfires too; sellers’ advisors assume the buyer will either skip steps or come back asking for more time.

Breakup fees and reverse termination fees

Breakup fees are rare in lower middle market LOIs. Common in public company M&A and larger private deals ($100M+ EV). In sub-$50M private deals, the seller’s protection is exclusivity and the buyer’s protection is deposit refund triggers.

Reverse termination fees (buyer pays if the deal fails) appear when financing is uncertain. Strategic buyers with financing conditions may agree to a reverse termination fee equal to seller’s diligence costs ($250k to $500k on $20M+ deals). PE buyers with committed equity rarely give them. The lower-middle-market equivalent is the earnest money forfeit: a $50k deposit, held in escrow, forfeit if the buyer walks soft.

Working capital peg: the silent killer of LOIs

The working capital adjustment is where most post-LOI re-trades happen. The buyer wants the business delivered with a “normal” level of working capital. The seller wants to sweep as much cash as possible. The number that resolves this is the working capital peg.

2026 PE buyer default: trailing 12 month average. “Net working capital target of $1.2M, calculated as trailing 12 month average of (current operating assets minus current operating liabilities), excluding cash and debt.” Major M&A counsel (Latham & Watkins, Kirkland & Ellis) and AICPA working capital guidance use trailing 12 months as the baseline.

Sellers push for trailing 3 or 6 months when seasonality runs in their favor. For an HVAC business going into summer cooling season, a trailing 3 month average can set the peg $300k to $500k higher. State the methodology in the LOI, not “to be negotiated.” See our working capital adjustment in a 2026 acquisition.

Reps and warranties treatment and R&W insurance

Above $10M EV, representations and warranties insurance (RWI) is now the default. The 2025 Lowenstein Sandler RWI Report and Marsh’s 2025 Transactional Risk Year in Review show R&W insurance attaching to 60 to 70 percent of private M&A deals above $20M EV. Premium: 2.5 to 3.5 percent of policy limit; limit usually 10 percent of EV.

Four largest R&W brokers: Marsh, Aon, Lockton, Beecher Carlson. Each runs a carrier panel (AIG, Beazley, Euclid, Liberty, Tokio Marine HCC). On $10M to $50M deals: 1 percent retention, 12 to 18 month survival on general reps, 6 year survival on fundamentals.

State the R&W approach in the LOI. “Buyer intends to procure buyer-side R&W insurance with $1.5M limit (15 percent of EV). Seller indemnity limited to 0.5 percent escrow for retention. Fundamentals capped at 100 percent of price, 6 year survival; general reps 18 months.” Without RWI: escrow 6 to 8 percent (ABA 2025), 12 to 18 month survival, cap ~escrow on general / 100 percent on fundamentals. See reps and warranties insurance in a 2026 business sale.

Escrow and indemnification

Escrow on a non-RWI deal: 6 to 8 percent of purchase price. The ABA’s 2025 Private Target Deal Points Study reports a median of approximately 7 percent, held 12 to 18 months. On a $10M deal that is $700k in escrow.

Escrow on an RWI deal drops to 0.5 to 1 percent. The escrow only needs to cover the buyer’s R&W policy retention. On a $10M deal with 1 percent retention, $100k is enough. The seller is no longer on the hook for general indemnity above the retention.

Basket and cap. The basket is the minimum loss threshold before the buyer can claim. A “tipping basket” allows claims from dollar one once the threshold is crossed; a “true deductible basket” means losses below the threshold are never recoverable. ABA 2025: basket is usually 0.5 to 1 percent of price. Cap on general reps usually equals escrow (~7 percent) on non-RWI deals; cap on fundamentals is usually 100 percent of price.

Clean 2026 PE buyer default (non-RWI): “0.75 percent basket (true deductible), 7 percent cap on general reps, 100 percent cap on fundamentals, 18 month survival on general, 6 year survival on fundamentals.”

MAC clause and material adverse change

The Material Adverse Change (MAC) clause is the buyer’s right to walk if something genuinely bad happens between signing and closing. Pandemic-era jurisprudence (notably the Delaware Court of Chancery’s analysis in AB Stable v. MAPS Hotels) confirmed MAC clauses are read narrowly: short-term hits, industry-wide disruptions, and seller-favorable carveouts usually do not trigger MAC. The buyer must show a durationally significant impact specific to the target.

Plain MAC language for the LOI. “Buyer’s obligation to close is conditioned on the absence of any change, event, or condition that has had or would reasonably be expected to have a material adverse effect on the Target’s business, financial condition, or results of operations, taken as a whole, excluding general economic conditions, industry-wide changes, and changes in law applicable to all market participants.”

Carveouts are the negotiation. Sellers want broad carveouts (economy, industry, regulatory, pandemics, war, weather). Buyers want narrow ones. Middle ground: “exclude general conditions, but if the target is disproportionately affected, that disproportionate impact counts.”

Conditions precedent to closing

Keep the conditions list short and specific. 2026 PE buyer default: (1) confirmatory diligence; (2) definitive agreement; (3) required third-party consents; (4) no MAC; (5) reps accurate at close; (6) seller covenant compliance; (7) HSR clearance if applicable.

“Satisfactory diligence to buyer’s reasonable satisfaction” is the buyer’s escape hatch. Sellers’ counsel will push to narrow this to “no material adverse findings outside [enumerated categories].” Cleanest compromise: scope diligence categories in the LOI and accept that material findings can re-open price.

HSR threshold (2025): $126.4M (FTC published, adjusted annually). Sub-$50M deals skip HSR filing. The Chamber v. FTC ruling on February 12, 2026 vacated the new HSR Form; notification thresholds are unchanged.

Due diligence carveouts and scope

Scope diligence in the LOI so the seller can plan. “Customary diligence: financial (including quality of earnings by [Accounting Firm]), tax, legal, commercial, operational, IT (with cybersecurity), HR, environmental (Phase I ESA), insurance. Substantial completion within 45 days.”

Customer and employee interviews are sensitive. Sellers do not want customers or employees to know the business is for sale until late. Standard protocol: top 5 to 10 customer interviews under seller’s supervision in the final 14 days of exclusivity, under NDA. Same for key employees.

Quality of earnings is table stakes on $5M+ EBITDA deals. QoE is the buyer’s most expensive diligence workstream ($40k to $150k), prepared by an independent firm (BDO, RSM, Grant Thornton, EisnerAmper, or boutique shops like Cherry Bekaert or BPM). It validates trailing 12 month EBITDA, normalizes owner compensation, and surfaces working capital trends. Surprise re-trades after QoE delivery are the single biggest source of broken deals.

Common mistakes in a letter of intent to buy a business

Vague financing. “To be financed” or “subject to financing” without specifics is the #1 cause of LOI rejection in 2026. Even a high headline price will not overcome it.

Price as a range. Sellers anchor to the floor. State a single number.

“Working capital to be negotiated.” Invites the seller to push for trailing 3 months. State the methodology in the LOI.

Open-ended timeline. “60 to 90 days, one mutual 30 day extension” works. “Automatic extensions as needed” gets rejected.

Earnout as a stand-in for price. A $10M offer with $4M in earnout is a $6M offer with a kicker. Sellers know this.

No earnest money. Omitting earnest money signals you are not serious. $50k in escrow with defined refund triggers is table stakes.

Sloppy legal language. Sellers’ counsel spots a recycled template. References to “Delaware Chancery” on a Florida LLC, or “HSR clearance” on a sub-threshold deal, drop credibility immediately.

Sample letter of intent to buy a business: section by section

Opening. “[Buyer Entity] (“Buyer”) submits this non-binding letter of intent to acquire [Target] from [Seller]. Except for Sections 6, 7, 9, and 10, this letter is non-binding.”

Section 1: Transaction structure. Asset or stock purchase, acquisition vehicle, cash-free / debt-free treatment, tax election (e.g., Section 338(h)(10) or F reorganization).

Section 2: Purchase price. Single number, allocation across cash / rollover / seller note / earnout, working capital adjustment mechanic. Example: “$10,000,000: $8.5M cash at close, $1M senior subordinated seller note (5 year, 6 percent, amortizing), $500k earnout over 24 months tied to revenue retention, subject to trailing 12 month working capital adjustment.”

Section 3: Financing. Named sources with evidence attached as Exhibits A (equity commitment) and B (lender term sheet).

Section 4: Conditions to closing. Short, specific list: confirmatory diligence; definitive agreement; third-party consents; no MAC; reps accurate at close; HSR if applicable.

Section 5: Due diligence. Categories and 45 day timeline.

Section 6: Exclusivity (BINDING). “For 75 days post-LOI, Seller will not solicit, negotiate, or accept other offers for any sale, merger, recapitalization, or similar transaction. Seller will inform Buyer promptly of unsolicited inquiries.”

Section 7: Confidentiality (BINDING). Reference prior NDA or include a confidentiality clause covering information and the existence of the LOI.

Section 8: Reps, warranties, escrow, indemnification. Framework: RWI policy size, retention, basket, cap, survival.

Section 9: Earnest money (BINDING). “$50,000 to Escrow Agent within 3 business days. Applied to purchase price at close or refunded for financing failure, MAC, mutual termination, or seller breach. Forfeit if Buyer terminates without a defined refund event.”

Section 10: Expenses (BINDING). “Each party bears its own expenses regardless of closing.”

Section 11: Definitive agreement deadline. “Parties negotiate in good faith to execute a definitive purchase agreement no later than [75 days from LOI]. If not signed by such date, this LOI terminates (binding sections survive).”

Worked example: $3.5M EBITDA HVAC business LOI

Target. Family-owned residential HVAC in Tier 2 metro. 38 employees, $14.2M trailing revenue, $3.5M adjusted EBITDA, 24.6 percent margin (above residential HVAC industry median 13 to 16 percent per ServiceTitan 2024 HVAC Benchmark). Owner 62, will stay 6 months post-close.

Offer: 7.5x trailing EBITDA = $26.25M EV. Upper end of 2026 residential HVAC PE multiples (range 5.5x to 7.5x, IBBA Q3 2025; platform-quality $3M+ EBITDA businesses command the high end).

Mix. $22M cash (84 percent), $2.5M rollover (owner keeps 10 percent post-close), $1.75M earnout over 24 months tied to revenue retention.

Financing. $13.5M equity from Fund III ($180M dry powder Q1 2026), $8.5M senior debt under term sheet from regional bank dated June 12 2026 (5 year, SOFR + 525bps, 1.5x senior debt to EBITDA). Commitment and term sheet as Exhibits A and B.

Exclusivity: 75 days. Days 1 to 25 financial / tax / legal (QoE by RSM). Days 25 to 50 commercial / operational / IT / environmental. Days 50 to 75 definitive agreement and closing.

Working capital peg: $1.05M. Trailing 12 month average, excluding cash, debt, owner bonuses, seasonal customer prepayments. 90 day post-close settlement.

R&W insurance. $2.625M policy (10 percent EV) via Marsh-brokered carrier, 1 percent retention ($262,500), 12 / 6 year survival. Premium ~$73,500, buyer-paid.

Escrow. $262,500 (1 percent EV), 12 months, backstops R&W retention.

Earnest money. $100,000 to escrow within 3 business days. Refundable for financing failure, MAC, mutual termination, or seller breach.

Conditions. Confirmatory diligence; definitive agreement; owner transition; top 3 service managers’ retention agreements; no MAC; HSR not required.

Net effect. Committed equity, named lender, defined working capital methodology, RWI rather than long seller escrow. Beats a $27M LOI with vague financing and 120 day exclusivity in nearly every 2026 sell-side process.

2026 market data on LOI business purchase terms

Exclusivity: 60 to 90 days dominant range, median ~75 days lower-middle-market (Practical Law M&A Deal Trends 2025; ABA Private Target Deal Points Study 2025).

Escrow: 6 to 8 percent of price on non-RWI deals (ABA 2025, median ~7 percent). 0.5 to 1 percent on RWI deals.

Survival: 12 to 18 months general reps (ABA 2025). 6 years fundamentals (title, capitalization, tax). Indefinite on fraud.

R&W insurance attach rate: 60 to 70 percent of private deals above $20M EV (Marsh 2025 Transactional Risk Year in Review; Lowenstein Sandler 2025 RWI Report). Premiums 2.5 to 3.5 percent of policy limit. Major brokers: Marsh, Aon, Lockton, Beecher Carlson.

Basket: 0.5 to 1 percent of price (ABA 2025), typically true deductible.

Cap: ~escrow on general reps (6 to 8 percent non-RWI); 100 percent on fundamentals.

Earnest money: Standard on sub-$50M EV. $25k under $5M, $50k at $5 to $15M, $75 to $100k at $15 to $30M.

HSR threshold (2025): $126.4M (FTC). Sub-threshold deals skip the filing.

After the LOI: the 75 day path to closing

Day 1: deposit wires, exclusivity starts, 80 to 150 item diligence list sent, seller uploads to a virtual data room (Intralinks, Datasite, Firmex).

Weeks 2 to 5: QoE fieldwork, legal review, customer concentration analysis.

Weeks 5 to 7: management meetings, site visits, first draft of definitive purchase agreement circulated.

Weeks 7 to 10: definitive agreement negotiation (working capital peg, indemnification cap, MAC carveouts), R&W underwriting, financing finalization.

Weeks 10 to 11: signing. If diligence surfaces a material problem, the buyer can walk (if a refund trigger applies), re-trade price, or accept a non-price remedy (additional escrow, specific indemnity). The strongest LOIs minimize re-trade by doing real pre-LOI work.

Frequently asked questions

What is a letter of intent to buy a business?

The buyer’s 3 to 6 page proposal stating price, structure, financing, exclusivity, earnest money, and the schedule to a signed definitive agreement. Mostly non-binding except for four sections: exclusivity (no shop), confidentiality, expense allocation, and earnest money. If accepted, the seller grants exclusivity (typically 60 to 90 days) while the parties move toward the definitive purchase agreement.

Is an LOI for a business purchase legally binding?

Most of it is not. Price, structure, working capital, escrow, and indemnification are subject to the definitive agreement. Binding: exclusivity, confidentiality, expense allocation, earnest money. Clean LOIs state this explicitly: “Except for Sections X, Y, and Z, this letter is non-binding.”

How long should the exclusivity period in an LOI be?

60 to 90 days is the 2026 PE buyer norm (Practical Law 2025, ABA Deal Points Study 2025). 60 days for clean asset deals, 75 to 90 days for stock deals with regulatory or tax complexity. 120+ days reads as a buyer who is not ready; under 45 days reads as one who will skip steps. Median in lower-middle-market deals is approximately 75 days.

How much earnest money should be in a business purchase LOI?

$25k under $5M, $50k at $5 to $15M, $75 to $100k at $15 to $30M. Held in escrow with a neutral third party. Refundable for financing failure, MAC, mutual termination, or seller breach. Forfeit if the buyer walks soft. Now competitive table stakes on lower-middle-market deals.

What is the working capital peg and why does it matter in an LOI?

The target net working capital the seller commits to deliver at close. Closing below the peg cuts purchase price dollar for dollar. 2026 default methodology: trailing 12 month average of (operating current assets minus operating current liabilities), excluding cash and debt. State the methodology in the LOI to avoid post-LOI price renegotiation, especially on seasonal businesses.

What is R&W insurance and should I use it?

A buyer-side policy that backstops the seller’s reps so the seller does not need to fund a large escrow. On deals above $10M EV, R&W is used in 60 to 70 percent of transactions (Marsh 2025 Transactional Risk Review). Premium is 2.5 to 3.5 percent of policy limit; limit usually 10 percent of EV. Major brokers: Marsh, Aon, Lockton, Beecher Carlson. R&W shortens negotiation and drops seller escrow from 7 percent to less than 1 percent.

What is the difference between an LOI and a term sheet?

In lower-middle-market M&A, mostly interchangeable. “Letter of intent” is more common in deal documents; “term sheet” is more common in venture and growth equity. Both cover the same ground: proposed economic terms, exclusivity, conditions, and process before definitive documents.

Can the seller negotiate the LOI?

Almost always. Sellers push back on price basis, working capital peg methodology, exclusivity length, deposit refund triggers, conditions, and the definitive agreement deadline. Expect 1 to 2 rounds. The cleaner the initial draft, the fewer rounds. See our seller-side LOI guide for 2026 for what good pushback looks like.

Selling soon? Take our free 2-minute valuation survey or book a 30 minute confidential call. We work founder-led home services deals including the HVAC sell-side process, and we help sellers structure seller financing. See our partner network.