The Funnel, Ep. 11: What’s an LOI?

Описание: What Is a Letter of Intent (LOI) When Selling a Business?
Founders often hear the term LOI used loosely during exit discussions, but misunderstanding what a letter of intent actually means can create real risk once you’re deep in a sale process.

In this episode of The Funnel, Kirk Michie explains what a letter of intent really is, how it differs from an indication of interest, and why it represents a critical transition point in the sell-side process. The discussion walks through what an LOI typically includes, how exclusivity works, and what buyers are actually trying to accomplish during this stage of due diligence.

This matters because signing an LOI changes how you can operate in the market. While it is not a final purchase agreement, certain provisions are binding and can temporarily limit your ability to engage with other buyers. Understanding these mechanics helps founders protect leverage, avoid accidental violations, and make informed decisions that impact valuation certainty, deal timing, and buyer fit.

Kirk also explains how private equity and strategic buyers use the LOI period to validate financials, assess customer and product alignment, and confirm whether the business fits their portfolio or growth strategy. The goal of this episode is to give founders clarity on what committing to an LOI actually means, what it does not mean, and why proper legal and advisory guidance is essential before signing.

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Episode Transcript

The Funnel – What Is a Letter of Intent (LOI)?
Speaker: Kirk Michie

Hey founders, Kirk Michie again. We’re working our way down The Funnel.

We started broad with questions like how to figure out valuation, what multiples apply to your business, and how to prepare for going to market. The middle of the funnel focused on whether to hire an investment banker, what the process looks like, how long it takes, and how buyers are found.

Now we’re at the bottom of the funnel. You’ve decided you want to sell, but there are still certain terms and parts of the process you want to be confident about before retaining an M&A lawyer, a business broker, an investment banker, or deciding to go it alone.

One term that gets used incorrectly quite often is LOI, or letter of intent.

Frequently, a buyer will first discuss value through what’s called an indication of interest. That’s a less formal way to start a dialogue about price. A letter of intent is more structured and typically includes several components.

First, it acknowledges confidentiality. Second, it addresses valuation, or at least outlines what information will be required to validate the proposed price. Third, it usually includes an exclusivity period.

That exclusivity period is when the buyer uses internal and external resources to review your financials, examine documents, evaluate customers, and confirm that this is the business they want to buy. A private equity firm may be determining how the business fits into an existing platform. A strategic buyer may be evaluating geographic expansion, product fit, or service adjacency.

Once both parties sign the LOI, you are agreeing to sell the business under those terms, and the buyer is agreeing to pursue the acquisition under those same terms. During the exclusivity window—often 90 to 120 days—you agree not to speak with other buyers.

It’s important to remember that a letter of intent is not a purchase contract. It is generally non-binding, but certain provisions are binding. Confidentiality and exclusivity must be honored. You cannot agree to exclusivity and continue discussions with another buyer. That would be a violation of the LOI and could expose you to legal action.

Because it is non-binding overall, you are not obligated to complete the sale. If you get the wrong impression from the buyer, you can ask to terminate the LOI. If there is significant exclusivity time remaining and you no longer intend to sell to that buyer, it’s often better for both sides to release each other rather than leave the business frozen in the market.

The key points to remember are that an LOI is formal, it specifies price, it often outlines deal financing, and it defines timing and information requirements. However, signing it does not force you to sell your business.

Never sign a letter of intent without professional advice. M&A legal counsel is essential, and investment banking guidance can help ensure the terms reflect current market standards.

Even after an LOI is signed, there are additional documents, diligence steps, and decision points before a transaction is completed. Understanding this stage clearly helps founders manage risk, maintain leverage, and move through the exit process with confidence.

That covers this part of the bottom of the funnel. We’ll continue with additional elements soon.