The Letter of Intent to Buy a California Business

The letter of intent, often called an LOI or a term sheet, is where most business sales get priced. Once it’s signed, the price rarely goes up, and the buyer’s lawyer drafts the purchase agreement from it. Sellers who sign a vague LOI to “get things moving” usually spend the next two months giving back what they thought they’d agreed to.

Is a letter of intent to buy a business binding in California?

Parts of it are, if you write it that way, and the rest isn’t. California courts look at the words the parties used. A letter that shows no binding contract will exist until a formal agreement is signed is treated as an unenforceable “agreement to agree.”

That rule comes with a California twist. In Copeland v. Baskin Robbins U.S.A. (2002) 96 Cal.App.4th 1251, the Court of Appeal held that a contract to negotiate an agreement is different from an agreement to agree, and can be formed and breached like any other contract. The court also held that the injured party’s damages are limited to reliance losses, such as out-of-pocket costs of negotiating, and not the profits the deal would have produced.

In Copeland, a buyer signed a letter setting out the price for a plant’s equipment and a supply arrangement “subject to a separate co-packing agreement and negotiated pricing.” The seller later broke off negotiations. The buyer lost because he sought only lost profits and couldn’t show reliance damages.

The practical lesson cuts both ways. If you want to walk away freely, say that neither side has any obligation to negotiate or to close until a definitive agreement is signed. If you want protection for the money you’ll spend on diligence, say the parties will negotiate in good faith during the exclusivity period, and keep receipts.

A clause is binding only if it meets the basic elements of a contract: parties capable of contracting, their consent, a lawful object, and consideration (Civ. Code § 1550). The mutual promises in the binding sections usually supply the consideration.

Which terms should bind, and which shouldn’t?

The deal terms should be non-binding. The process terms should bind. A good LOI numbers its paragraphs and says which ones are which.

Term	Usually binding?	Notes
Price and payment terms	No	Subject to diligence and the definitive agreement
Asset sale or entity sale	No	Decide it before signing, even though it isn’t binding
What’s included and excluded	No	Cash, receivables, inventory, vehicles, real estate, the business name
Seller note or earn-out	No	Amount, term, interest, security, guarantee
Seller’s non-compete and transition help	No	Area, length, and paid consulting period
Conditions to closing	No	Financing, lease assignment, licenses, key customer consents
Target dates	No	Diligence deadline, signing, closing
Confidentiality	Yes	Or incorporate an NDA already signed
Exclusivity (no-shop)	Yes	Short, defined, and ends automatically
Access for diligence	Yes	Who can talk to employees, customers, landlord, and when
Expenses	Yes	Usually each side pays its own
Deposit	Yes, if there is one	Who holds it and when it’s refundable
Governing law, termination, and the binding/non-binding clause itself	Yes	California law for a California business

What should a letter of intent to buy a California business cover?

It should cover every term that could kill the deal later. If a point would make either side walk away, it belongs in the LOI now, not in the purchase agreement six weeks from now.

Price, structure, and what’s being sold

State the price and whether it’s an asset sale or a purchase of shares or membership interests. The difference is covered in how to sell a small business in California. List what’s included and what isn’t, and say whether the price assumes the business is delivered free of debt, with a normal level of working capital.

How the price gets paid

Cash at closing, a seller note, an earn-out, or a mix. If the seller is carrying part of the price, the LOI should give the principal, rate, term, security, and any personal guarantee. The tax side is covered in installment sales of a California business. If the buyer is borrowing, ask early how its lender will treat a seller note.

Due diligence period

Give the buyer a defined period to review records, starting on a stated date, and list what the seller will produce. The due diligence checklist shows what buyers usually ask for.

Exclusivity

The seller agrees not to shop the business to other buyers for a set time. From the seller’s side, keep it short, tie it to the buyer hitting its dates, and make it end on its own if the buyer misses them.

Confidentiality

The buyer is about to see your tax returns, customer list, and payroll. If you haven’t signed a separate NDA, the LOI’s confidentiality clause should be binding and should survive if the deal dies. See NDAs for California businesses.

The seller’s non-compete

California voids most non-competes, but a person who sells the goodwill of a business, or an owner who sells all of an ownership interest, may agree not to carry on a similar business within a specified geographic area where the business operated (Bus. & Prof. Code § 16601). Put the area and length in the LOI so neither side is surprised later. See non-competes in California.

Key employees

Buyers often want the seller’s managers to stay. The buyer can offer them jobs and retention bonuses. The buyer can’t make them sign non-competes, because California voids any non-compete clause in an employment contract that doesn’t fit an exception (Bus. & Prof. Code § 16600). Confidentiality and trade secret protections are the buyer’s tools here.

Lease, licenses, and consents

List the consents the deal needs: the landlord, key customers or suppliers whose contracts require consent to assign, and any license or permit that doesn’t transfer. The landlord is the consent most likely to hold things up. See commercial lease review for California tenants.

California closing mechanics

Name the escrow holder and say the sale will close through escrow with CDTFA and EDD clearances and any required bulk sale notice. Those steps take weeks, so the closing date should allow for them.

A sample structure for the binding and non-binding clause

This is an outline to show the shape, not a form to copy. The exact words depend on the deal.

1. Paragraphs 1 to 9 (price, structure, assets, payment, non-compete, transition, conditions, dates) state the parties’ current intentions only. They aren’t binding, and no party has any obligation to negotiate, sign, or close on the basis of them.
2. Paragraphs 10 to 15 (confidentiality, exclusivity, access, expenses, governing law, and this paragraph) are binding when both parties sign.
3. No agreement to buy or sell the business exists until a definitive purchase agreement is signed and delivered by both parties.
4. Either party may end negotiations at any time before that, for any reason, subject only to the binding paragraphs.

Clause 4 is the one that decides whether a Copeland claim is possible. Leave it out and add a good-faith negotiation promise, and you’ve created a contract to negotiate. Some buyers want that protection. Most sellers don’t. Decide on purpose.

A worked example: an LOI for a Santa Barbara marketing agency

A buyer offers $1,200,000 for a Santa Barbara marketing agency owned by two members of an LLC. The first draft LOI says “purchase of the business” and “price to be paid on customary terms.”

The seller’s side rewrites it before signing:

• Structure: purchase of 100 percent of the membership interests, so client contracts stay in place without assignment.
• Payment: $900,000 cash at closing and a $300,000 note over four years, secured by the membership interests and personally guaranteed.
• Non-compete: both members sell all their interests, so each can agree not to run a competing agency in Santa Barbara and Ventura counties, where the agency operated, for as long as the buyer runs one there.
• Transition: six months of paid consulting at a stated rate.
• Exclusivity: 45 days, extended only if the buyer has delivered a first draft of the purchase agreement.
• Binding clauses: confidentiality, exclusivity, expenses, governing law, and a statement that nothing else binds anyone.

The price didn’t change. The seller’s risk did.

Frequently asked questions

Can I back out after signing a letter of intent?

Usually, yes, if the LOI says its deal terms aren’t binding and there’s no obligation to close until a definitive agreement is signed. You’re still bound by the clauses marked binding, like confidentiality and exclusivity. If the LOI promises good-faith negotiation, walking away in bad faith can expose you to the other side’s reliance damages under Copeland.

Who drafts the letter of intent?

The buyer usually sends the first draft, often with a broker’s help. The seller should have the draft reviewed before signing, not after, because the terms rarely improve for the seller once exclusivity starts.

How long should exclusivity last?

Long enough for the buyer to finish diligence and financing, and no longer. From the seller’s side, tie any extension to the buyer meeting its own deadlines.

Is a letter of intent the same as a purchase agreement?

No. The LOI outlines the deal. The purchase agreement is the binding contract with representations, warranties, indemnities, and closing conditions, and it replaces the LOI’s deal terms entirely.

Should the LOI include a deposit?

It can. A deposit held in escrow shows the buyer is serious. The LOI should say when it becomes non-refundable and when it goes back to the buyer.

What if the other side refuses to negotiate after we sign?

That depends on what the binding paragraphs say. If you believe you have a claim for breach, that’s a dispute for litigation counsel. I can refer you.