What Is a Letter of Intent? LOI Meaning, Binding Clauses and Examples (2026)

A letter of intent is often the first document you sign in a big deal: buying a business, leasing a storefront, bringing in a partner. It feels informal, a few pages summarizing what you've agreed so far, but it sets the price and terms you'll negotiate from and can contain promises that bind you immediately. This guide explains what a letter of intent means in US business in 2026, which clauses are typically binding and which aren't, sample wording for the clauses that matter, how LOIs work for acquisitions, commercial leases and hiring, and the mistakes that turn a "non-binding" letter into an expensive one.

Quick answer

A letter of intent (LOI) is a short document that records the main terms two parties plan to put into a final contract: for example, the price and structure of a business sale or the rent and term of a lease. The business terms are usually non-binding, but clauses the LOI says are binding, typically confidentiality, exclusivity, costs and governing law, are enforceable from signature.

• Courts look at the wording and the parties' conduct to decide what binds

• Say clearly which sections are binding and that no deal exists until a definitive agreement is signed

• An exclusivity (no-shop) clause takes the seller or landlord off the market for a set period

• A promise to negotiate in good faith can be enforced, with real damages

• SBA recommends an attorney and accountant help prepare and review an LOI to buy a business

What does letter of intent mean?

A letter of intent is a written outline of a deal that hasn't been finalized yet. One party, usually the buyer or tenant, sends it to the other, and if both sign, it becomes the agreed starting point for due diligence and for drafting the full contract, which lawyers call the definitive agreement: the asset or stock purchase agreement, the lease, or the partnership agreement.

The LOI does three jobs. It confirms that the two sides agree on the big points before either spends serious money on lawyers, accountants and inspections. It sets the rules for the negotiation period, such as how long the seller will stop talking to other buyers and how confidential information will be handled. And it gives lenders, landlords and advisers something concrete to work from.

You'll see the same idea under other names. A term sheet is a bullet-point version, common in investment rounds and licensing. A memorandum of understanding (MOU) is often used for partnerships, joint ventures and arrangements with government bodies. An indication of interest (IOI) is a looser, earlier signal in a sale process, often giving a price range rather than a number. Heads of terms is the British name. None of these labels decides whether the document is binding; the words inside it do.

Is a letter of intent legally binding?

US courts treat this as a question of intent. They read the document as a whole and look at what the parties said and did. If the LOI states that its business terms are non-binding and that neither side is obligated until a definitive agreement is signed, courts generally won't enforce it as a contract to sell or lease. If the language is vague, or the parties start acting as though the deal is done, a court may find a binding agreement, or at least a binding promise to keep negotiating.

Two well-known cases show the stakes. In January 1984, Pennzoil and Getty Oil's main shareholders announced an agreement in principle for Pennzoil to buy a large stake in Getty Oil, subject to final documents, when Texaco stepped in with a higher offer. A Houston jury found Texaco had interfered with what it saw as a binding deal and, on November 19, 1985, returned a $10.53 billion verdict; Pennzoil later settled with Texaco for $3 billion after Texaco filed for bankruptcy. More recently, in SIGA Technologies v. PharmAthene, the Delaware Supreme Court held in 2013 that where parties agree to negotiate in good faith based on a term sheet, that duty is enforceable, and that a party who negotiates in bad faith can owe the profits the other side would have made had the deal gone through. On remand, the damages award was about $113 million before interest and fees, and the Delaware Supreme Court upheld it in 2015.

The practical lesson for a small business is simple: decide which parts you want to be bound by, say so plainly, and behave consistently with what you wrote.

Binding vs non-binding: how LOIs are usually split

Some LOIs also include a binding duty to negotiate in good faith. That can help a buyer who is spending heavily on diligence, but as the SIGA case shows, it can create real liability for the side that walks away for the wrong reasons. If you don't want that obligation, the LOI should say neither party has any duty to continue negotiating.

Sample LOI clauses and what they do

The wording below is illustrative and simplified so you can see how each clause works. It isn't a template to copy without advice; state law and your deal will change the details.

The confidentiality clause often points to a separate non-disclosure agreement signed earlier in the process; our NDA guide covers what that agreement should contain.

Letters of intent for buying a business

In a small business acquisition, the LOI usually arrives after the buyer has reviewed a summary of the business and a few years of financials, and before the deep dive into the books, customers, leases and staff. SBA's guide to buying a business suggests having an attorney and an accountant help you create and evaluate the letter of intent, and lists the investigation you'll need to do afterward: licenses and permits, zoning, environmental issues and the business's value.

Where the LOI sits in a business purchase

Step 1

NDA and first look at financials

Step 2

Letter of intent

price, structure, exclusivity

Step 3

Due diligence and financing

Step 4

Purchase agreement

the binding contract

Step 5

Closing and transition

A strong acquisition LOI typically covers:

• Price and how it was reached. Often a multiple of seller's discretionary earnings or EBITDA, with any adjustment for inventory or working capital.
• Structure. Asset purchase (the usual choice for small deals, because the buyer picks which assets and liabilities it takes) or a purchase of the shares or membership interests.
• Financing. Cash at closing, an SBA or bank loan, a seller note, or an earnout tied to future performance.
• What's included. Equipment, inventory, customer lists, phone numbers, websites and trademarks, and what's excluded, such as cash and receivables.
• Due diligence and timing. How long the buyer has, what it can see, and the target closing date.
• Exclusivity. How long the seller stops marketing the business.
• People. Whether the owner stays on for a transition period, and how key employees will be handled.
• Conditions. Financing, landlord consent, licence transfers and a satisfactory purchase agreement.

Here's a hypothetical example of how the money section might look for a $1.2 million purchase of a service business using an SBA 7(a) loan:

The SBA's rules on equity injection, seller notes and lender requirements change from time to time, so confirm the structure with your lender before you put numbers in the LOI; see our SBA 7(a) loan guide. Use our valuation calculator to sanity-check the price.

Very large deals bring federal antitrust rules into play. Under the Hart-Scott-Rodino Act, acquisitions above $133.9 million in 2026 can require a premerger filing with the FTC and Justice Department before closing, with filing fees starting at $35,000. Few Main Street deals come near that, but it's a reason larger LOIs include regulatory conditions.

Letters of intent for commercial leases

For a storefront, office or warehouse, the LOI (landlords and brokers sometimes call it a proposal) captures the business terms before the landlord's lawyer drafts a lease that may run to 50 pages. Because the lease will be long and drafted by the landlord, the LOI is your best chance to win the points that matter.

Typical commercial lease LOI terms:

• Premises and use. The exact space and square footage, and a use clause broad enough for how your business might grow.
• Term and options. Length of the initial term, renewal options and any early termination right.
• Rent and increases. Base rent per square foot, annual increases, and any free-rent period while you fit out.
• Operating costs. Whether the lease is gross or triple-net (NNN), your share of taxes, insurance and common-area maintenance (CAM), and any cap on CAM increases.
• Tenant improvements. Who builds what, and the landlord's tenant improvement (TI) allowance.
• Exclusive use. A promise that the landlord won't lease nearby space in the same center to a direct competitor.
• Security. Deposit, letter of credit, and whether you must give a personal guarantee, and whether it can be capped or burn off over time.
• Contingencies. Permits, zoning, financing or franchisor approval of the site.

Most lease LOIs state that neither party is bound until the lease is signed, and landlords may keep showing the space until then. If you need certainty while you finish permits or financing, negotiate a short binding exclusivity period in the LOI. If you're opening a franchise, check that the franchisor's site approval and any required lease rider are conditions in the LOI; see our franchise guide.

Letters of intent in hiring and other settings

In hiring, "letter of intent" has two common meanings. Job seekers sometimes send a letter of intent, essentially a cover letter expressing interest in a role or employer, often when no specific opening is posted. Employers sometimes use the phrase for what is more often called an offer letter: a document stating the position, pay, start date and conditions such as a background check. Because most US employment is at-will, an offer letter rarely guarantees a job for a fixed period unless it clearly says so, and employers usually include a sentence confirming at-will status. If you're hiring, keep the letter consistent with your employee handbook and avoid language promising permanent or guaranteed employment.

College sports used a formal National Letter of Intent for decades, but the NCAA's Division I Council voted to eliminate it, and recruits now sign athletics aid agreements with their schools instead. Grant programs and foundations also use letters of intent, meaning a short pre-application that tells the funder you plan to apply.

Franchise buyers should be careful with "deposit" or "reservation" letters. Under the FTC Franchise Rule, a franchisor must give you its disclosure document at least 14 calendar days before you sign a binding agreement or pay any money, so a binding LOI with a deposit should wait until that period has run.

How to write a letter of intent

1. 1

   Agree the big points first

   Price or rent, structure, timing and key conditions. If you can't agree these, an LOI won't help.

2. 2

   Draft on letterhead with clear headings

   Number each section so you can list exactly which sections are binding.

3. 3

   Add the binding protections you need

   Confidentiality, exclusivity with an end date, costs, governing law and termination.

4. 4

   State that everything else is non-binding

   Say that no party is obligated to complete the deal until a definitive agreement is signed.

5. 5

   Set a response deadline

   Give the other side a date by which to sign, after which the offer lapses.

6. 6

   Have it reviewed and keep copies

   Ask your attorney and accountant to review it, then keep the signed version with your deal records.

Risks and common mistakes

Calling it non-binding and then acting as if it's done. Announcing the deal to staff and customers, starting to run the business, or paying deposits can support an argument that the parties meant to be bound. Keep conduct consistent with the paper.

Leaving the non-binding statement vague. "This letter is subject to contract" is better than nothing, but a clear list of which numbered sections bind, and a statement that nothing else does, is far better.

Agreeing to an open-ended exclusivity period. A seller who grants 120 days of exclusivity with no end trigger can lose other buyers while the first one stalls. Use a fixed end date and let the seller terminate if the buyer misses milestones such as a loan commitment.

Settling the price but not the mechanics. Disputes often come from what the price includes: inventory, receivables, working capital, deposits and debt. Spell out the basis in the LOI so the purchase agreement doesn't reopen it.

Skipping confidentiality. Employees, customers and competitors can learn a business is for sale. A binding confidentiality clause, or a separate NDA, should cover the LOI's existence as well as its terms.

Expecting the price to hold no matter what diligence finds. Buyers often lower their offer after due diligence, which dealmakers call a "retrade." Sometimes that's justified: the books show lower earnings than the seller claimed, a key customer is leaving, or equipment needs replacing. Sometimes it's a tactic used once the seller has turned other buyers away during exclusivity. Sellers can reduce the risk by sharing accurate financials before the LOI, so the price is based on real numbers, and by keeping the exclusivity period short. Buyers should explain in the LOI what the price assumes, such as a minimum level of earnings or working capital, so any later adjustment rests on facts rather than leverage.

Forgetting about time limits. An LOI with no expiry can hang over both parties for months. Give the offer a response deadline, give exclusivity a fixed end date, and set an outside date after which either side can walk away if a definitive agreement hasn't been signed.

Signing without advice. The LOI frames every later negotiation. An hour of a lawyer's time at this stage usually costs less than renegotiating a bad price structure later.

What to do next

Before you draft, gather the numbers that support your terms: for an acquisition, the seller's financial statements and a valuation; for a lease, comparable rents and your build-out budget. Make sure an NDA is in place before sensitive information changes hands. If you'll need financing, talk to your lender before signing so the LOI's financing condition and timeline are realistic, and use our business plan generator to prepare what the bank will ask for.

Official links

• SBA: Buy an existing business or franchiseDue diligence, valuation and professional help
• SBA 7(a) loansFinancing for business acquisitions
• FTC premerger notification (HSR) thresholds 2026When large acquisitions need a federal filing
• FTC Franchise RuleDisclosure timing before signing or paying a franchisor

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

What does letter of intent mean?

A letter of intent (LOI) is a short document in which two parties set out the main terms of a deal they intend to make, such as the price, structure and timing of a business purchase or the rent and term of a lease, before lawyers draft the full contract. Most of an LOI is usually non-binding, but specific clauses such as confidentiality and exclusivity are often written to be binding.

Is a letter of intent legally binding?

It depends on the wording and the parties' conduct. Courts look at whether the parties intended to be bound. An LOI that says its business terms are non-binding and that no deal exists until a definitive agreement is signed is generally not enforceable as a sale or lease. Clauses expressly stated to be binding, such as confidentiality, exclusivity, expenses and governing law, usually are.

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

They overlap heavily. A term sheet is usually a bullet-point list of deal terms, common in financing and licensing. An LOI is the same idea written as a letter, common in acquisitions and leases. A memorandum of understanding (MOU) is often used for partnerships, joint ventures or government arrangements. In each case, the label matters less than the words saying which parts are binding.

How long is an exclusivity period in a letter of intent?

There's no legal standard; it's negotiated. For small business acquisitions, buyers often ask for 45 to 90 days to complete due diligence, line up financing and sign a purchase agreement, sometimes with an automatic extension if financing is in process. Sellers should keep the period as short as is realistic and make it end automatically if the buyer walks away.

Is a letter of intent the same as a job offer?

Not usually. In hiring, employers more often use an offer letter, which states the job, pay and start date. Some employers call this a letter of intent, and some candidates send a letter of intent to express interest in a job or program. Either way, most US employment is at-will, so a letter like this rarely guarantees employment for a set period unless it says so.

Do I need a lawyer to sign a letter of intent?

It's wise for anything significant. The LOI sets the price, structure and exclusivity you'll be negotiating from, and its binding clauses take effect when you sign. A lawyer can make sure the non-binding language is clear, the exclusivity period is reasonable and the confidentiality terms protect you. For a business purchase, SBA suggests involving an attorney and an accountant in preparing and evaluating the LOI.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 8 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.Buy an existing business or franchise — U.S. Small Business Administration · accessed 8 October 2026
2. 2.FTC Announces 2026 Update of Jurisdictional and Fee Thresholds for Premerger Notification Filings — Federal Trade Commission · accessed 8 October 2026
3. 3.Revised Jurisdictional Thresholds for Section 7A of the Clayton Act (91 FR 2133) — Federal Register (Federal Trade Commission) · accessed 8 October 2026
4. 4.16 CFR § 436.2 — Obligation to furnish documents (Franchise Rule) — Legal Information Institute, Cornell Law School (Code of Federal Regulations) · accessed 8 October 2026
5. 5.Delaware Supreme Court Holds That Expectation Damages Involving the Breach of an Obligation to Negotiate in Good Faith a License For Early Stage Drug Are Not Too Speculative — K&L Gates LLP · accessed 8 October 2026
6. 6.PharmAthene press release on Delaware Supreme Court decision (Exhibit 99.1) — U.S. Securities and Exchange Commission (EDGAR filing) · accessed 8 October 2026
7. 7.Getty Oil — Wikipedia · accessed 8 October 2026
8. 8.NCAA moves to eliminate National Letter of Intent (NLI) — FootballScoop · accessed 8 October 2026