LOI Structuring & Preliminary Due Diligence

A vague LOI can sink your deal before diligence even begins.

If you're buying a small business, the Letter of Intent (LOI) is your first formal signal to the seller—and to your lenders—that you're serious. But most LOIs get rushed. They lack detail, omit protection clauses, and fail to reflect the latest SBA requirements. That can cost you the deal, the relationship, and tens of thousands of dollars in diligence expenses.

In this post, you'll learn how to structure an LOI that survives scrutiny, protects your downside, and makes you look credible from Day One—all based on insights from Patrick O’Connell’s recent webinar.

Why the LOI Is More Than Just a Form

Many first-time buyers treat the LOI as a handshake—a placeholder before “real” negotiations. But the truth is, a well-written LOI is your deal roadmap. It sets expectations around price, timing, financing, and post-close conditions. It’s also what your SBA lender will use to begin underwriting. If the LOI is vague or unrealistic, it may delay (or kill) your loan approval.

Even though the LOI is non-binding, most sellers interpret it as a sign of the buyer’s professionalism. A clean, clear LOI builds trust. A sloppy one raises red flags.

New SBA 7(a) Rule Changes (Effective June 1, 2025)

Before we get into LOI structure, you need to understand how the new SBA rules affect what goes into your offer. These changes apply to all 7(a)-financed acquisitions after June 1, 2025:

• 10% Equity Requirement: You must contribute a true 10% equity injection. Seller financing can’t count toward this unless it’s on full standby for 10 years.

• Partial Buyouts Require Seller Guarantee: If the seller is staying in the business with retained ownership, they must personally guarantee the loan for the first two years.

• Seller Notes on Standby: Seller notes can’t count toward equity unless fully subordinated for a decade. That affects structure, deal appeal, and how you negotiate the terms of the note.

If your LOI proposes a deal that doesn’t comply with these changes, your lender will reject it. So these rules are not optional—they must shape your LOI strategy from the start.

When to Draft and Send Your LOI

The LOI sits between early interest and formal diligence. You’ve had initial conversations, reviewed basic financials, and you’re excited—but haven’t hired accountants or lawyers yet. That’s when the LOI comes in.

A typical LOI allows:

• 60–90 days of exclusivity

• Time to complete financial due diligence

• Time for SBA loan processing and legal review

Sending an LOI too early can spook sellers if you don’t know enough about the business. Sending it too late risks losing the deal to another buyer. Aim for the moment when you've seen enough to make a serious offer but haven’t invested heavily in diligence yet.

🎥 Watch the Full Webinar

Want to dive deeper into LOI structure, SBA rule updates, and real-world examples?

📺 Watch “LOI Structuring & Preliminary Due Diligence”

Core Elements Every LOI Must Include

1. Purchase Price & Payment Structure

Don’t just list the total enterprise value. Break it down:

• Cash at Close: What’s being paid on Day One.

• Seller Note: Include interest rate, term, and whether it's on standby.

• Equity Injection: Your down payment, especially if using SBA.

• Earnouts or Contingent Payments: If applicable, detail triggers.

This breakdown helps SBA lenders understand the deal and ensures everyone’s on the same page.

2. Deal Structure (Asset vs. Stock)

Be explicit about whether this is an asset or stock sale. This affects:

• Tax consequences

• Legal structure

• Transfer of liabilities

Also specify the purchasing entity. Will it be your search LLC or a new acquisition entity?

3. Timeline and Diligence Period

Your LOI should include a realistic timeline for:

• Financial and legal diligence

• SBA loan approval

• Final purchase agreement drafting

Most effective LOIs include 60–90 days for diligence and closing. Anything less can be too aggressive, especially if you need bank financing.

4. Exclusivity Clause

Exclusivity gives you a defined window where the seller cannot negotiate with other buyers. It protects your investment in diligence and prevents surprises.

Typical terms:

• 30 to 90 days of exclusivity

• Seller agrees not to solicit or accept other offers

• Binding clause, even though the rest of the LOI is non-binding

5. Termination & Walkaway Language

Deals fall apart. Your LOI should give you an out if:

• Diligence reveals discrepancies

• Financing isn’t approved

• The seller breaches exclusivity

Avoid legal ambiguity. Make it clear under what conditions you can walk without penalties.

Sample LOI Breakdown: Real Deal Example

In the webinar, Patrick shared a real-world LOI for a $6.75 million landscaping company. The structure looked like this:

• Total Price: $6.75M

• Cash at Close: $6M

• Seller Note: $750K at 8% interest, amortized over five years, with two years of interest-only

• Deposit: $10,000 upon signing

• Employment Agreement: One year for the sellers post-close

• Exclusivity: 60 days

• Working Capital: 12-month average included as a peg

• Termination Rights: Tied to diligence and financing

This LOI covered every major risk area and aligned with SBA and seller expectations—making it fundable and executable.

Start Preliminary Due Diligence Before Sending the LOI

Even though deep diligence happens after signing, you should conduct basic checks beforehand:

Financial

• Revenue trends and seasonality

• Owner compensation and add-backs

• Working capital needs

• SBA debt service coverage

Operational

• Key employees and their roles

• Owner involvement

• Client concentration

Legal

• Contracts with customers and vendors

• Any change-of-control triggers

• Open lawsuits or regulatory issues

This early diligence gives you leverage in LOI negotiations and helps you avoid unpleasant surprises.

Avoid These Common LOI Mistakes

Too many buyers sabotage good deals with sloppy LOIs. Here are the most common mistakes:

• No exclusivity clause – Seller keeps shopping the deal

• Ambiguous payment terms – Confuses lenders and sellers

• Unrealistic timelines – Delays closing

• No exit language – Traps you in a bad deal

Instead, be specific, balanced, and aligned with SBA requirements. A good LOI is a sign of a good buyer.

Further Reading: Mastering LOI Structuring and Diligence

If you're drafting an LOI or preparing for early-stage diligence, these articles will help you navigate term sheets, legal protections, and deal-killing mistakes—before you invest serious time or capital.

“Mastering the Transition from First Call to LOI” – DueDilio
Walks you through the steps from initial call to LOI signature—covering data requests, next steps, and how to balance speed with thoroughness.
🔗 duedilio.com

“Pre‑Acquisition LOI Essentials: Key Components for Success” – ExitAdvisor
Lays out the LOI as a deal blueprint, emphasizing structure, legal protections, and due diligence components that matter most.
🔗 exitadvisor.io 

“Understanding an M&A Letter of Intent” – DealRoom
A concise breakdown of LOI structure, purpose, and how it signals intent and sets the foundation for due diligence.
🔗 dealroom.net 

“Integration Clauses and Letters of Intent” – Harvard Law School Forum on Corporate Governance
A deep dive into which LOI provisions can inadvertently become binding—offering guidance on how to structure clauses (like exclusivity, confidentiality, and earn-outs) to ensure enforceability only as intended.
🔗 corpgov.law.harvard.edu 

“A Look at the Letter of Intent” – Deloitte
Clarifies the role of an LOI: defining key terms, distinguishing binding vs non-binding components, and showing how a strong LOI improves negotiation leverage and risk mitigation during diligence.
🔗 deloitte.com 

Final Takeaway

Your LOI is your first real step toward owning a business. It shows the seller (and lender) that you’re serious, organized, and ready. If you skip details, ignore SBA rules, or leave out key terms like exclusivity and working capital, you’ll lose momentum—or worse, lose the deal.

But if you build it right, your LOI becomes a powerful roadmap. One that gets you through diligence, financing, and across the finish line.

“The LOI is where you lock in leverage. If it’s not in writing, it won’t happen.”