Before you grant exclusivity, make the buyer prove the money. Ask an individual for a personal financial statement and institution-verified balances, ask a fund for a signed support letter naming its investors, and ask anyone borrowing for a credit-approved lender term sheet. Then tie every extension to a dated financing milestone.
Why does exclusivity to an unfunded buyer cost so much?
Exclusivity is your promise to stop talking to every other buyer for a fixed period. It is the one thing a seller actually gives away at the letter-of-intent stage, and it is paid in time, not money. Granting it to a buyer who cannot fund costs months of market access that never come back.
Most of a letter of intent is non-binding only because it says so. Whether a paragraph binds turns on its words and the parties’ intent, not the heading above it, so a sloppy letter creates obligations you never priced. Make the carve-out name what survives: exclusivity, confidentiality, expenses, governing law, nothing else.
A promise to negotiate can also be enforced. Under Delaware law, where parties expressly agree to negotiate in good faith in accordance with a term sheet, that obligation is enforceable, and expectation damages may follow where a court finds the parties would have reached agreement but for bad-faith negotiation. Your letter may be governed by another state’s law, states differ, and that damages finding is hard to win.
Law: SIGA Technologies, Inc. v. PharmAthene, Inc., 67 A.3d 330 (Del. 2013).
The real damage is usually arithmetic. You cannot keep a second buyer warm, and your trailing twelve-month figures roll forward anyway. A soft quarter inside a dead exclusivity period becomes the newest number the next buyer diligences.
What should you ask an individual buyer for before signing the LOI?
An individual buyer should produce a signed personal financial statement and third-party verification of the liquid assets listed on it, dated within thirty days. The statement sets out assets, liabilities and their sources. Verification means account statements or a letter from the institution holding the money, produced whole and unaltered.
There is a public template. SBA Form 413, Personal Financial Statement, is what the SBA uses to assess repayment ability and creditworthiness of applicants for 7(a) loans, 504 loans, disaster loans and surety bond guarantees. A buyer heading toward SBA debt completes one anyway. Ask for it in week one, not week six.
Form: SBA Form 413, Personal Financial Statement.
Then read it the way a lender would. Home equity is not cash. A retirement balance is not cash until withdrawn or borrowed against. Ask in writing whether any funds are borrowed, pledged elsewhere, or held jointly, and note that in community property states a spouse’s signature can be needed to move them. Then ask whether the buyer must sell a house or another business to close. The lender’s paperwork will not necessarily disclose that.
I ask for the account statement before I ask for the resume.
What is the difference between a pre-qualification letter and a credit-approved term sheet?
A pre-qualification letter says a lender looked at a borrower and thinks a loan of roughly some size is plausible. A credit-approved term sheet says the lender’s credit function reviewed the actual target company and approved specified terms, subject to listed conditions. Only the second document reflects anyone having read your financial statements.
The two look alike, both on bank letterhead, both encouraging. Federal consumer guidance makes the point plainly: lenders use “prequalification” and “preapproval” inconsistently, and some issue a prequalification letter on unverified information the applicant reported about himself. That guidance covers consumer mortgage lending, not commercial acquisition loans, and binds no business lender. The vocabulary problem is identical.
Guidance: Consumer Financial Protection Bureau, Ask CFPB, prequalification and preapproval letters.
Five tests separate them.
- Does it name your company, or only the buyer and a dollar range?
- Does it say credit approval has been granted, and give its date?
- Does it list conditions — valuation, appraisal, cash verification — or is it silent?
- Is it signed by a credit title, or by a business development officer?
- Does it disclaim, anywhere, being a commitment to lend?
A credit approval is still conditional, and the conditions are where deals die. But it is evidence that a credit officer opened the file. Require the full document, dated, delivered to your counsel. An email summary is not the document.
A pre-qualification letter describes the buyer. A credit approval describes your company. Only one means someone read your financials.
What should you ask a search fund or independent sponsor for?
A search fund buyer should give you the names of the investors funding the equity and a signed support letter from them. An independent sponsor should confirm in writing whether a committed fund exists. Where none exists, the equity is raised after the letter of intent is signed, using your exclusivity as the sales tool.
Stanford Graduate School of Business reports on 862 core search funds formed in the United States and Canada since 1984, with data through 2025. The aggregate acquisition rate since 1996 has been 58 percent, acquisitions take roughly twenty months, and the median purchase price in 2024 and 2025 was $16 million. Read that figure twice.
Data: Stanford Graduate School of Business, 2026 Search Fund Study.
So ask. Is the search capital committed, or is the searcher self-funded? Will a lead investor sign a letter naming a dollar figure and addressed to you? An equity commitment letter of the sort used in sponsor deals is uncommon at this size, so that support letter is the realistic ask. Read it for one word. “Intends” is a hope. “Commits” is a promise.
What proof should you require from each type of buyer?
Proof scales to buyer type. An individual proves cash with statements. A borrower proves debt with a credit approval. A fund proves equity with a support letter from named investors. A corporate buyer proves authority with a board approval and written confirmation that its own credit facility permits the acquisition.
| Buyer type | Ask for this before exclusivity | What it proves | What it does not prove |
|---|---|---|---|
| Individual using own cash | Personal financial statement plus verified balances, dated within thirty days | The money exists and whose name it sits in | That it is unpledged, unborrowed, or free of spousal consent |
| Individual using SBA debt | Credit-approved term sheet naming your company, plus cash verification | A credit officer underwrote this deal | That a loan number issues, or under which rulebook |
| Search fund with committed capital | Investor support letter signed by named investors | The equity is backed by identified parties | That one investor must fund if others decline |
| Independent or fundless sponsor | Written confirmation whether a committed fund exists, plus named capital partners | Whether the equity is raised | That the raise succeeds in your timeline |
| Strategic or corporate buyer | Board or member approval, plus confirmation its credit agreement permits the acquisition | Internal authority to sign | That its own lender has consented |
Which SBA rulebook applies to your buyer’s loan, and why does the date matter?
SBA SOP 50 10 8 took effect June 1, 2025 and governs loans that receive an SBA loan number before October 1, 2026. SOP 50 10 8.1 takes effect that day and replaces it. Which rulebook applies is fixed by the date the loan number issues, not by the date you sign the letter of intent.
SBA also revised SOP 50 10 8 by procedural notice effective March 1, 2026, tightening applicant ownership citizenship and residency requirements for 7(a) and 504 loans. That is your problem as much as the buyer’s: if an owner of the acquisition entity fails it, the loan does not happen, and you learn late. As of September 2026 both books are live.
Rule: SBA SOP 50 10 8, effective June 1, 2025.
Rule: SBA Procedural Notice 5000-876626 (Feb. 11, 2026), revising SOP 50 10 8 effective March 1, 2026.
Rule: SBA SOP 50 10 8.1, effective October 1, 2026, announced by SBA Information Notice 5000-880695 (Aug. 14, 2026).
A package submitted in September that gets its number in October falls under the newer book, and structures built on the older one may need rework that comes out of your exclusivity. Ask the lender in writing which SOP version the credit approval is written under, and when it will request the loan number. What the buyer must contribute, and how a note you carry is treated, are set by whichever version governs. Make somebody name the book.
Should the letter of intent condition closing on the buyer obtaining financing?
A financing condition is a closing condition that excuses the buyer from closing if the loan does not arrive. Almost every buyer borrowing to fund a purchase will insist on one, and refusing outright shrinks your buyer pool. The question is not whether to accept a financing condition. It is what you charge for it in time.
Know what it excuses. It excuses the failure to close. It does not excuse a buyer who never applied, who restructured the deal into something no lender would approve, or who broke a covenant to pursue financing. Say so in the document; a bare financing condition is read as written.
You may be told financing conditions are off-market. In deals many times this size, funded by sponsors with committed debt, they are unusual, and so is the data quoted at you. The American Bar Association’s 2025 Private Target Deal Points Study examined 139 acquisition agreements priced from $25 million to $900 million; 97 had a closing deferred after signing. That sample sits above most privately held businesses. Do not import its terms. Import one fact: there is a window between handshake and wire, and financing risk lives inside it.
Data: American Bar Association Business Law Section, 2025 Private Target Mergers and Acquisitions Deal Points Study.
Here is the rule to hold. A financing condition and a long exclusivity period are both buyer protections, and the buyer does not get both. Pair the condition with three covenants: a complete application within a stated number of days, no restructuring that forces re-approval, and written notice within two business days of any adverse change in the lender’s position. Breach of one ends exclusivity. Otherwise the condition is a free option on your company, and you wrote it.
How long should exclusivity run and how should extensions work?
Exclusivity should run for a short fixed period that expires by its own terms, with each extension earned by a dated financing milestone the buyer has actually hit. The letter of intent should name the milestones, name the document that proves each one, and state that exclusivity ends automatically when a date passes, without notice and without cure.
A workable ladder, adjusted to your lender’s pace.
- Day 0. Exclusivity begins only when the credit-approved term sheet and cash verification are in hand. No documents, no clock.
- Day 10. Complete loan application delivered, evidenced by the lender’s written acknowledgment.
- Day 30. Written credit approval naming your company, delivered in full to your counsel, with third-party reports ordered.
- Day 60. Lender’s closing conditions list delivered, with the buyer’s cash contribution verified.
- Any miss. Exclusivity ends that day. Extensions in writing, signed, short, each tied to the next milestone.
Automatic is automatic only if the paragraph says so; termination on a missed date must be self-executing on its face, or you will argue about notice while the clock runs. Write the remedy in too. Loss from a broken exclusivity clause is hard to quantify, so ask for the right to seek injunctive relief and for your out-of-pocket costs. A court supplies neither for you.
Two more provisions. A change of lender ends exclusivity and requires a fresh grant, because a new lender restarts underwriting from zero. And refuse any clause extending exclusivity while the buyer is “proceeding diligently.” That one is enforced by arguing about a state of mind while your company sits off the market.
I read the exclusivity paragraph and the financing paragraph together before I read the price.
Exclusivity is the one thing you actually give away. Give it in dated increments, and make the buyer earn each one.
What should you do this week if a letter of intent is on your desk?
Three things decide whether a letter of intent is worth signing: proof of the buyer’s cash, proof of the buyer’s debt, and a dated exclusivity schedule. Ask for the first two before you sign anything. Build the third into the letter of intent itself. Price and structure follow once those three are settled.
- Send one email asking for a single list: the personal financial statement, institution-verified balances dated within thirty days, the complete lender term sheet, the lender’s credit contact.
- Ask the lender which SOP version the approval is written under, and when the loan number will be requested.
- Look up the buyer’s acquisition entity in the state’s business records. Formation date and standing tell you whether it exists.
- Redline the exclusivity paragraph before you redline the price.
If a buyer will not produce these documents while asking you to stop talking to the market, that is your answer, and it cost one email to get.
Keep reading
The Seller’s LibraryEverything you do not settle in the letter of intent, you concede after you sign itThe Seller’s LibraryWhen to let a buyer meet your employees and customersThe Buyer’s LibraryParts of your letter of intent bind you at signature.
Have a lawyer read it before you sign.
A sale is decided in a handful of documents you sign exactly once — the letter of intent, the working capital definition, the indemnity. There is no rush. When you want those read properly, we are here.
Before founding Prencipe International, Joe practiced at the top law firms in the world, including Freshfields Bruckhaus Deringer, Baker McKenzie, Morgan Lewis & Bockius, and served at the U.S. Securities and Exchange Commission. He has spent his career on high-stakes disputes and transactions for businesses that cannot afford to lose. He represents owners selling the company they spent a career building -- reading the letter of intent before it is signed, and the purchase agreement while there is still room to change it.
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