You've worked for decades to build your business. Then one day a buyer sends you a Letter of Intent, and suddenly the finish line feels close.
But here's what most business owners don't realize: the LOI is where deals are won or lost. It's not just a formality. The terms inside that document shape your final sale price, your timeline, your tax outcome, and how much control you have once the process begins.
Before you sign anything, you need to understand exactly how to evaluate an LOI, and what to watch out for. This guide breaks it all down.
What Is a Letter of Intent in an M&A Transaction?
A Letter of Intent (LOI) is a non-binding agreement between a buyer and seller that outlines the key terms of a proposed business acquisition. It covers the purchase price, deal structure, exclusivity period, due diligence timeline, and other major conditions.
While most LOI provisions are non-binding, two sections are almost always legally binding: the exclusivity clause and the confidentiality agreement. This distinction matters enormously, and most sellers miss it.
Why the LOI Matters More Than Most Sellers Think
Once you sign an LOI and enter exclusivity, you lose negotiating leverage. You've agreed to stop talking to other buyers for a set period, typically 45 to 90 days. If the buyer uses that window to re-trade the deal (lower the price, change terms), your options become limited.
This is why experienced M&A advisors say: the best time to negotiate is before you sign the LOI, not after. Every concession you make at this stage costs real money at the closing table.
The 7 Key Terms to Evaluate in Any LOI
1. Purchase Price and Structure
The headline number matters, but the structure matters just as much. Is it all cash at close? Or does it include an earnout, a portion paid based on future performance targets?
Earnouts look attractive on paper but often go uncollected. If more than 15–20% of your deal value is tied to an earnout, scrutinize the metrics carefully. Vague or subjective performance targets are a red flag.
2. Working Capital Peg
Most LOIs include a working capital target, the amount of net working capital expected to remain in the business at closing. If the actual working capital at close falls below the peg, you owe the buyer a post-closing adjustment. This is one of the most overlooked and costly provisions in any deal.
Understand the formula used to calculate working capital, the reference period, and the dispute resolution mechanism before you sign.
3. Exclusivity Period
How long are you locked out from talking to other buyers? Thirty days is reasonable. Ninety days gives the buyer enormous leverage with very little accountability. Negotiate the shortest exclusivity window you can, and insist on buyer milestones. If the buyer misses them, exclusivity should expire automatically.
4. Representations and Warranties Preview
Some LOIs outline the scope of representations and warranties the seller will be required to make at closing. These can significantly affect your indemnification exposure after the deal closes. Review any referenced rep and warranty language with your advisor and legal counsel before agreeing to it.
5. Due Diligence Scope and Timeline
Broad, open-ended due diligence requests with no defined end date are a warning sign. A well-structured LOI defines the due diligence scope, what materials will be requested, and when the process concludes. This protects you from a buyer who uses endless diligence as a stalling or re-trading tactic.
6. Conditions to Closing
What conditions must be met before the buyer is legally obligated to close? Financing contingencies are especially dangerous, if the buyer's financing falls through, they can walk away. Whenever possible, negotiate for buyers with committed capital or equity funding, not financing-dependent structures.
7. Non-Compete and Transition Terms
Most buyers require a seller to sign a non-compete agreement and remain available for a post-closing transition. Understand the geographic scope, the duration, and whether you'll be compensated during the transition period. These terms directly affect your life after the deal closes.
Red Flags in an LOI That Sellers Often Miss
- Vague or undefined earnout metrics, without clear, measurable milestones, earnouts rarely pay out
- Overly broad due diligence provisions with no defined end date
- No break-up fee if the buyer walks after the LOI is signed
- Financing contingency without evidence of committed capital
- Non-compete clauses that are excessively broad in geography or duration
- Purchase price adjustments tied to subjective EBITDA re-calculations by the buyer
Should You Counter an LOI?
Yes, almost always. Most buyers submit a first LOI with terms skewed in their favor. It's standard practice, and buyers expect sellers to push back. A professional M&A advisor will help you counter strategically, protecting value without jeopardizing the buyer's interest.
The goal is not to win every point. It's to close the gaps that could cost you real money or operational control between signing and closing.
How a Competitive Process Changes Everything
The single most powerful protection against a bad LOI is having multiple offers. When more than one qualified buyer submits an LOI, you can compare terms, not just price. Buyers who know they are competing become more aggressive on valuation, more flexible on structure, and less likely to re-trade during due diligence.
This is why running a structured, advisor-led sell-side process consistently outperforms accepting the first offer you receive. Unsolicited offers, by definition, carry no competition, and buyers know it.
The Role of an M&A Advisor in the LOI Process
An experienced sell-side M&A advisor does more than find buyers. They create a competitive process that generates multiple LOIs, then help you evaluate and negotiate each one. Their value in the LOI phase includes:
- Marking up LOI language to protect your interests before you sign
- Advising on working capital peg methodology and negotiation
- Pushing back on exclusivity window length and buyer milestones
- Stress-testing earnout structures for collectability
- Modeling the after-tax proceeds of different deal structures
The advisor's fee is typically a fraction of the value they protect or create at this stage of the process.
Conclusion
Learning how to evaluate an LOI is one of the most important things a business owner can do before entering a sale process. The headline price is just the beginning. The terms inside the LOI define what you actually take home, and how much leverage you retain between signing and closing.
If you've received an LOI or are preparing to enter a sale process, First Turn Capital can help you review the terms, run a competitive multi-buyer process, and negotiate the best possible outcome. Contact us to start a confidential conversation.
Frequently Asked Questions
Q: Is a Letter of Intent legally binding? A: Most LOI provisions are non-binding, but the exclusivity clause and confidentiality provisions are almost always legally binding. Always have an attorney and M&A advisor review these sections before signing.
Q: How long should the exclusivity period be in an LOI? A: A reasonable exclusivity period is 30 to 60 days. Periods beyond 90 days significantly reduce the seller's negotiating leverage if issues arise during due diligence.
Q: What is a working capital peg and why does it matter? A: A working capital peg is a target level of net working capital that must remain in the business at closing. If the actual working capital falls short at close, the seller may owe the buyer a post-closing cash adjustment, sometimes worth hundreds of thousands of dollars.
Q: Can you negotiate the terms of an LOI? A: Yes. Most buyers expect sellers to counter-propose LOI terms. A sell-side M&A advisor can identify which terms are negotiable and help you counter effectively without jeopardizing the deal.
Q: What happens if a buyer re-trades after the LOI? A: Re-trading, reducing the offer price or changing deal terms after the LOI is signed, is a common buyer tactic during due diligence. The best protection is a short exclusivity window, clear buyer milestones, and an experienced advisor who has navigated this tactic before.
Q: Do I need a lawyer to review an LOI? A: Yes. While an M&A advisor handles deal strategy and negotiation, a transaction attorney should review all legal provisions in the LOI, particularly indemnification language, representations and warranties scope, and any dispute resolution mechanisms.
