Search Fund LOI Template: What to Include (And What to Avoid)

The Letter of Intent is one of the most consequential documents in the search fund acquisition process — and one of the least well-documented for ETA-specific contexts.

Most LOI templates online are generic M&A documents written for investment bankers representing institutional buyers in $100M+ deals. The dynamics in a search fund deal are different: the seller is often a first-time seller, the buyer is often a first-time buyer, and the advisor ecosystem is leaner on both sides. The LOI has to accomplish the same legal purpose while accounting for a business owner who may have never sold a company.

This guide covers what should be in your LOI, common first-timer mistakes, how to handle the most negotiated terms, and what to include in the NDA that precedes it.

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What Is a Letter of Intent?

A Letter of Intent (LOI) outlines the key terms of a proposed acquisition before the definitive purchase agreement. Many commercial terms are intended to be non-binding, while provisions such as exclusivity, confidentiality, expenses or governing law may be binding depending on the wording. Have counsel identify which obligations the draft creates. The LOI commonly addresses:

• Purchase price and structure
• Exclusivity period and no-shop provisions
• Key representations the buyer relies on
• Working capital peg expectations
• Closing conditions (financing, due diligence completion)
• Timetable and milestones

A good LOI demonstrates that you understand the business and have thought through the proposed terms. Involve counsel while the draft is being prepared, before a signature creates obligations you did not intend.

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The 10 Essential Terms

1. Purchase Price: State the proposed value and its earnings basis, such as EBITDA or SDE (Seller's Discretionary Earnings). Business quality, growth, risk, financing and the transaction structure all affect the price you can support.

   Include: The headline number (specific, not a range), the basis for that number, and any price adjustment mechanisms.

   Mistake to avoid: Offering a range. A range signals uncertainty and invites sellers to anchor on the top number. Pick your number and defend it.

2. Transaction Structure: Asset deal vs. stock deal has significant tax implications for both parties. Search fund buyers typically prefer asset deals. Sellers often prefer stock deals (capital gains treatment).

   Include: Your preferred structure with brief rationale. Flexibility language is appropriate: "We prefer an asset sale but are open to discussing structure with your advisors."

3. Exclusivity Period: A provision commonly intended to be binding. Agree on a window that reflects the diligence, financing and legal work the transaction requires.

   Include: Specific duration (not "approximately"), clear start date, and a no-shop clause — the seller agrees not to solicit competing offers during the exclusivity window.

   Mistake to avoid: Exclusivity without a meaningful no-shop. Sellers will sometimes continue marketing a business while you're in due diligence unless this is explicit.

4. Financing Contingency: The capital structure differs between SBA-financed self-funded searches and traditional funded searches. Your LOI should describe the financing conditions that apply to your actual transaction.

   Include: "Subject to Buyer obtaining satisfactory financing." Be specific about financing type if you've already begun lender conversations — specificity signals competence and preparation.

5. Working Capital Peg: One of the most frequently misunderstood and most litigated terms in lower middle market M&A. The working capital peg defines the amount of normalized working capital the seller must leave in the business at close.

   Include: A preliminary working capital target based on your initial financial review. Define what's included: current assets minus current liabilities, excluding cash and current portion of debt.

   Mistake to avoid: Ignoring the peg in the LOI. Working capital disputes at close are common — setting expectations early reduces the likelihood of a last-minute fight that risks the deal.

6. Key Representations: LOIs typically include high-level representation expectations. At minimum: financial statements are accurate, no undisclosed liabilities, no pending litigation, no material adverse changes since the financial statements.

7. Employee Treatment: State your intention to retain key employees at comparable compensation, and flag any specific retention discussions you anticipate.

8. Seller Transition: Almost all search fund acquisitions include a seller transition period, typically 3–24 months. State your expectations: full-time or part-time? Paid consulting agreement or equity-based vesting?

9. Confidentiality of the LOI: Include a provision making the LOI itself confidential. Sellers often don't want their brokers, employees, or competitors knowing an LOI exists before close.

10. Break Fee / Good Faith Deposit: Less common in ETA deals than larger PE transactions, but increasingly requested by experienced sellers. If you're asking for 90-day exclusivity, some sellers request a good faith deposit ($25K–$100K) forfeited if you walk without cause.

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The NDA: What It Needs to Cover

The Non-Disclosure Agreement typically precedes the LOI by 2–6 weeks. Verify it covers:

• Definition of Confidential Information: broad enough to cover financials, customer lists, employee data, operational methods
• Non-solicitation: you agree not to recruit the seller's employees for X years (2 years standard)
• Return/destruction clause: confidential materials returned or destroyed if the deal doesn't close
• Term: 2–3 years standard; shorter is more buyer-friendly
• Carve-outs: public information, independently developed information, legally compelled disclosure
• Non-circumvention: if working with an intermediary, prevents going directly to the seller after introduction

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5 Common First-Timer Mistakes

1. Signing documents without legal review: Have acquisition counsel review the NDA and LOI, including the binding provisions, confidentiality duties and restrictions on your conduct. A familiar template still needs to fit the transaction.

2. Offering a price range: Ranges invite anchoring. Pick a number.

3. Ignoring the working capital peg: The peg becomes a closing dispute more often than any other term. Define it in the LOI, even preliminarily.

4. Overpromising on close timing: Most searchers underestimate due diligence complexity. Build buffer into your exclusivity period. A 75-day window you burn through is worse than a 90-day window with 2 weeks to spare.

5. No timetable: An LOI without milestones creates scheduling chaos. Include: diligence complete by [date], financing committed by [date], definitive documents by [date].

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Keep the offer connected to the model

Before drafting the letter, test the price, capital structure and operating assumptions in acquisition underwriting. The question is whether the terms describe a case you are prepared to pursue.

SearchWare's LOI, IOI and NDA workflow starts an offer from a saved underwriting scenario and generates a Word draft from the offer's terms. NDA drafts use your firm's template or the SearchWare starter. Review the wording with counsel, then keep revisions, responses and exclusivity dates with the deal.

Once an LOI is accepted, use the diligence portal to turn the next phase into assigned requests, advisor workstreams and visible milestones. Check plans and legal-tool availability; NDA and offer-letter drafting are included in Pro and above.

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See also: Search Fund Due Diligence Checklist | How to Manage a Search Fund Pipeline