The Letter of Intent (LOI) is a short, mostly non-binding document signed early — it sets price, exclusivity, and the diligence timeline, and it’s where you hold the most leverage in the deal. The Asset Purchase Agreement (APA) is the long, fully binding contract that actually closes the deal — reps, liabilities, escrow, and the final price.
The same deal, two very different documents — here’s what each one actually does.
| Dimension | Letter of Intent (LOI) | Asset Purchase Agreement (APA) |
|---|---|---|
| When it’s signed | Early — once you and the seller agree on price, before exclusivity or diligence starts | Late — after 60–120 days of diligence and negotiation, right before closing |
| Typical length | Short — a letter, not the full contract | Long — about 60 pages, the actual binding contract |
| Is it binding? | Mostly not. Price and structure can still move — but confidentiality, exclusivity, expense allocation, and the earnest-money deposit are binding the moment you sign | Yes. Once signed, almost everything in it is binding |
| What it locks in | Price, deal structure, the exclusivity window, and the diligence timeline | Reps and warranties, assumed vs. excluded liabilities, escrow and indemnification, and the purchase-price allocation |
| The working-capital peg | Defines the peg and states it will be trued up dollar-for-dollar, reconciled 60–120 days post-close | Sets the exact mechanics — actual vs. peg compared at closing, reconciled 60–90 days later |
| Buyer’s main protection | A financing or diligence contingency — walk away and get the earnest money back | Escrow holdback and indemnification — claim against it if a rep turns out false |
The moment you sign the LOI, the seller takes the business off the market and stops shopping the deal to other buyers — and from that point, the negotiating math runs against you. Every problem diligence turns up becomes a reason to lower the price. Every problem it doesn’t turn up becomes a reason for the seller to hold firm. You had the most leverage the day before you signed, when the seller had been sitting on the market for months and you could walk away for nothing.
That’s exactly why the terms you skip at the LOI stage don’t come back later. Once the APA is signed, almost everything in it is binding — and everything you and the seller discussed during the LOI no longer applies unless it actually made it onto the page. A buyer who signs a thin LOI to keep things moving, planning to fight for reps, escrow, and liability protections once the “real” contract gets drafted, ends up negotiating those terms from inside exclusivity — after the seller has already stopped shopping the deal and the buyer has already sunk time and diligence costs into walking away. The leverage that existed before signing is gone by the time the APA lands on the table.
Here’s what that looks like in dollars. Say you’re buying a $450,000 business, and the LOI defines the working-capital peg the way it should — a normalized 6-to-12-month average of accounts receivable, inventory, and prepaids, minus payables and accruals, trued up dollar-for-dollar and reconciled 60–120 days after close. Diligence sets that peg at $55,000. If the seller lets receivables run down and inventory thin out in the final weeks before closing and the actual number lands at $40,000, the true-up isn’t a rounding error — it’s $15,000, owed back to you dollar-for-dollar, exactly as the LOI defined it.
A buyer who let “we’ll sort out working capital later” slide at the LOI stage doesn’t get to have that argument at closing — they get whatever the seller feels like conceding, negotiated from inside exclusivity, after diligence costs are already sunk. The escrow holdback works the same way. Put a holdback of around 10% of price into the LOI — on that same $450,000 deal, $45,000, inside the standard 5–15% range and held 12 to 18 months — and it’s a term the seller already agreed to before the APA gets drafted. Leave it out, and you’re proposing it for the first time after the seller has stopped shopping the deal, with every reason to argue the number down or argue no escrow is needed at all.
None of this matters if the deal shouldn’t have reached an LOI in the first place. That screening happens earlier — pulling SDE and its add-backs, customer concentration, and owner dependence out of the CIM before you ever draft a letter. The LOI and APA are two steps inside a longer sequence; the how-to-buy-a-business pillar guide walks the whole thing end to end.
Mostly not. The price and deal structure in an LOI are typically non-binding and can still move during diligence. But a few clauses bind the moment you sign: confidentiality, the exclusivity (no-shop) period, expense allocation, and the earnest-money deposit. Courts have also enforced LOIs as real contracts when the non-binding language was sloppy and the parties’ conduct looked like a completed deal — so what the document actually says matters more than what it’s titled.
Commonly 60 to 120 days. That window covers due diligence and the actual negotiation of the purchase agreement — the LOI just starts the clock and sets the terms everything else gets negotiated around.
Technically yes, but you’re negotiating from a weaker position. Once you sign the LOI, the seller takes the business off the market and exclusivity begins — and everything discussed at the LOI stage no longer applies unless it actually makes it into the APA. Terms you fight for early are the terms you get; terms you wave through to keep things moving are gone for good.
Most small-business deals are structured as asset sales, which is what buyers usually push for — you leave undisclosed liabilities behind unless you specifically agree to assume them, and you get a stepped-up tax basis on what you bought. Sellers often prefer a stock sale instead, because it qualifies for capital-gains tax treatment. The structure gets proposed in the LOI and finalized in the APA, and it’s a real negotiation between buyer and seller, not a formality.
Indemnification backed by an escrow holdback. A slice of the purchase price — commonly 5% to 15%, held 12 to 18 months — sits with a neutral escrow agent instead of going straight to the seller. If a representation in the APA turns out false, you make a claim against that escrow instead of chasing the seller in court, subject to the survival period, the cap, and the basket written into the agreement.
In cash, dollar-for-dollar. Actual working capital at closing gets compared to the peg defined in the LOI, and the difference is reconciled 60 to 120 days later once the real numbers settle. Come in below the peg and the seller owes you the shortfall — in practice that often gets paid straight out of the escrow holdback instead of you chasing the seller directly, which is exactly why the peg and the holdback belong in the LOI together, not as two separate afterthoughts.
For the clause-level detail: the Letter of Intent post walks through every clause worth fighting for and includes a fill-in-the-blank template, and the Asset Purchase Agreement post breaks down reps, escrow, the working-capital peg, and purchase-price allocation, clause by clause.
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