Before You Sign an LOI: Which Terms Can Bind You?

A seller receives a two-page letter of intent for the sale of her business. The price looks attractive, and the document says the transaction is non-binding. She signs, expecting the lawyers to handle the details later. The next week, a second buyer approaches. Only then does she focus on the first buyer’s exclusive negotiating period.

This hypothetical illustrates why an LOI deserves attention before you sign. It often sets out the proposed deal without committing you to complete it. But certain promises may take effect immediately. You need to understand both the deal you are considering and the obligations you are accepting while you explore it.

Understand which promises take effect when you sign

Start with the clause identifying which sections are intended to bind the parties. Does it list them by name or number? Does it clearly state which sections are binding and which are not? If you cannot tell, ask your lawyer to walk you through them before signing.

Binding provisions often cover confidentiality, exclusivity, access to information, expenses, which state’s law applies and how disputes will be resolved. Their terms can be negotiated. As a buyer or seller, you should understand what you are promising, when each obligation begins, how long it lasts and which obligations continue if the deal falls through.

Know how long you are taking your business off the market

Exclusivity is a real commitment even when the price remains tentative. If you are selling, time spent off the market has value. If you are buying, the cost of investigating the business can be harder to justify while the seller shops your offer to other bidders.

Read what the exclusivity provision allows and prohibits. It may restrict soliciting other offers, responding to unsolicited bidders, sharing information or negotiating with someone else. Some provisions also require the seller to notify the buyer when an unsolicited offer arrives. Do not assume you can engage with another bidder simply because that bidder contacted you first.

Check the end date and any right the buyer has to extend it. Consider whether extensions should depend on measurable progress, such as completing an agreed stage of diligence, rather than happening automatically. The period should give the buyer a realistic opportunity to investigate without leaving the seller tied up indefinitely.

Do not assume you can walk away without consequences

You can agree to negotiate without agreeing to complete the sale. California courts recognize that distinction. In Copeland v. Baskin Robbins U.S.A. (2002) 96 Cal.App.4th 1251, the court explained that a contract to negotiate can be enforceable even when the final transaction remains unresolved. Simply failing to reach a deal is not itself a breach.

The court also distinguished losses caused by relying on a negotiation promise from the profits someone hoped to earn from the deal. It affirmed judgment against the plaintiff because he could not prove the relevant reliance losses. Read the opinion.

For a business owner, the question is whether your LOI commits you to a negotiation process and what that commitment requires. An LOI may create an enforceable obligation to negotiate in good faith even without a breakup fee. But signing an LOI does not automatically create that obligation; the language, governing law and circumstances matter. Ask what freedom you retain to stop negotiations and which promises you must still honor.

Protect the business while the buyer investigates

A buyer may want customer data, employee details, contracts and financial records before committing. This investigation is commonly called due diligence. Your LOI should work with any existing nondisclosure agreement rather than accidentally replacing its protections. Ask which document controls if they conflict.

Agree on when and how the buyer can contact employees, customers, landlords and vendors. Sharing information in stages, removing sensitive details where appropriate and limiting access to competitively sensitive material can help protect the business. A broad right to inspect records should not become permission to disrupt operations. Also address what happens to shared material if negotiations end, including any permitted record-retention exceptions.

Look beyond the headline purchase price

An attractive price can conceal terms that substantially change what you receive. Is the buyer purchasing the company’s assets or your ownership interests? Must debt be paid off from the price? How much working capital—the resources needed for day-to-day operations—must remain in the business? How will inventory, cash, unpaid transaction expenses and customer prepayments be treated?

Also ask how and when you will be paid. Seller financing means you may receive part of the price over time. An earnout ties part of your payment to future results. Rollover equity means keeping or receiving an ownership stake rather than taking all cash. Each arrangement carries different risks.

These business terms may remain non-binding at the LOI stage, but discussing and documenting them early reduces surprises. A seller expecting cash at closing should not learn weeks later that the buyer assumes a substantial earnout or continuing investment.

Know the deadlines and the cost of ending discussions

Before signing, list the major deadlines, what each side must provide and who can extend the timetable. Check how notice must be given if you want to end discussions. Confirm who pays legal, accounting and other transaction costs if the sale does not happen.

Expense reimbursement and a breakup fee are different commitments. One may require you to repay specified costs; the other may require a stated payment if a defined event occurs. If either appears in the LOI, understand what triggers it, whether a limit applies and whether other claims remain available.

An LOI should give you room to investigate the deal while making your immediate commitments clear. Before signing, be able to answer three questions: What am I bound to do now? How long do those obligations last? What happens if the transaction never closes?

Sources checked October 1, 2026. General information only; not legal or tax advice.