Most business owners think the “deal” starts when they agree on a price. In reality, the deal begins when a buyer puts the terms in writing, typically in the Letter of Intent (LOI).
An LOI can feel like a milestone: a serious buyer, a headline number, progress. But for sellers, it’s also a decision point, setting expectations on price, structure, timeline, and control. Done well, it’s a clear roadmap to closing. Done poorly, you can lose leverage during diligence.
You can’t win a deal at the LOI stage, but you can make choices that protect your value and keep the process moving in your favor.
What is a Letter of Intent (LOI), really?
A Letter of Intent is a written document that outlines the major business terms a buyer proposes before drafting final legal agreements. It’s commonly described as “non-binding,” but that can be misleading.
Most LOIs are non-binding on the purchase itself (meaning either party can walk away before signing definitive agreements).
However, certain sections are often binding, including:
- Confidentiality terms (if not already covered by an NDA)
- Exclusivity / no-shop provisions
- Sometimes, the expense responsibility or governing law.
The LOI sections sellers need to understand are crucial because they set the foundation for negotiations and protect your interests throughout the process.
The LOI sections sellers need to understand
A strong LOI is clear and concise, empowering sellers to focus on key components such as purchase price and deal structure, which are crucial to control and success.
1) Purchase price (and what it actually includes)
The LOI will state a proposed purchase price, but sellers should immediately ask: price in what form?
- All cash at close is clean and straightforward.
- Seller financing shifts risk back to the seller.
- Earnouts tie part of the price to future performance.
- Holdbacks/escrows delay access to some of your proceeds.
Seller tip: Don’t focus only on the number. Focus on how certain that number is to prevent surprises during closing and when deferred payments are calculated.
2) Deal structure: asset sale vs. stock sale
The LOI may specify whether the transaction is an asset sale or stock sale (or membership interest sale for an LLC). Deal structure has significant implications for:
- Taxes
- Liability exposure
- Contracts and assignments
- Complexity of closing
Seller tip: A buyer might prefer asset deals for liability reasons; sellers may prefer stock deals for tax reasons. What matters is making sure the structure aligns with your goals and doesn’t create surprises later.
3) Working capital (the clause that quietly changes your net proceeds)
Working capital can be one of the most misunderstood LOI items. Buyers may require you to deliver the business with a “normal” level of working capital (cash, AR, inventory, AP) at closing. If the target is set too high, you can effectively give up value even if the purchase price stays the same.
Seller tip: Working capital should be crystal clear. Clear definitions and calculations help protect your value and avoid misunderstandings.
4) Exclusivity / no-shop (this is where leverage can disappear)
Exclusivity means you agree not to market your business or negotiate with other buyers for a specified period. This term is often binding.
On one hand, buyers want exclusivity because diligence is expensive and time-consuming. On the other hand, exclusivity can reduce your leverage, especially if the buyer starts “re-trading” the price during diligence.
Seller tip: Tie exclusivity to specific expectations: timeline, diligence milestones, and responsiveness. A long exclusivity period with vague milestones is rarely in the seller’s interest.
5) Timeline and process
A serious LOI outlines what happens next, including:
- Diligence start date
- Diligence duration
- Drafting definitive agreements
- Target closing date
Timelines protect sellers by providing clarity on next steps, helping them feel secure and in control of the deal’s progress.
6) Conditions and contingencies
Most LOIs include conditions, some of which are reasonable, some not. Common ones include:
- Financing contingency
- Satisfactory completion of due diligence
- Buyer approvals (board/investment committee)
- Key customer/contract confirmations
Seller tip: “Subject to due diligence” is normal. But terms should be specific enough to prevent an endless diligence loop and vague “outs.”
Common LOI mistakes sellers make (and how to avoid them)
Even experienced operators make LOI mistakes because it’s not their day job. Here are the most common pitfalls I see and why they matter.
Mistake #1: Treating the LOI like a formality
Some sellers sign quickly because the buyer “seems solid.” But LOI terms serve as the starting point for definitive agreements, and the buyer’s attorneys will build on them.
Fix: Slow down enough to understand the structure and risks before you sign anything.
Mistake #2: Falling in love with the headline price
A high number can hide unfavorable mechanics: a large earnout, heavy seller financing, aggressive working capital, or extended exclusivity.
Fix: Evaluate your offer by certainty and terms, not just the total stated price.
Mistake #3: Agreeing to overly long exclusivity
A 60–90 day no-shop clause is standard in most deals, but a clear plan should accompany it. Without milestones, it can become a one-sided option for the buyer.
Fix: Ask: “What will be completed by week two? Week four? What documents do you need, and when will you deliver drafts?”
Mistake #4: Not clarifying key definitions early
Words like “working capital,” “EBITDA,” “add-backs,” or “recurring revenue” can be interpreted differently by different buyers.
Fix: Don’t assume alignment. Clarify definitions and how calculations will be made.
Mistake #5: Bringing in help too late
Owners sometimes wait until after signing the LOI to involve a broker or attorney. By then, you may already be committed to a process with limited leverage.
Fix: Get counsel early before structure and exclusivity are locked in.
How a broker helps protect your leverage at LOI
A well-run LOI stage isn’t about being difficult; it’s about being clear. An experienced broker can protect your time, leverage, and outcome.
A broker’s value at LOI often includes:
- Helping you compare offers across price, structure, and certainty
- Negotiating terms like exclusivity length, working capital language, and payment mechanics
- Keeping multiple buyers engaged long enough to maintain leverage (when appropriate)
- Coordinating with your M&A attorney so LOI terms align with final agreements
- Preventing “deal drift” by enforcing timeline expectations
The goal is simple: ensure the LOI sets you up for a clean diligence process, rather than weeks of renegotiation and uncertainty.
What happens after you sign the LOI
Once the LOI is signed, the buyer typically moves into due diligence. Due diligence is where the buyer validates:
- Financial statements, quality of earnings, and add-backs
- Customer/contracts and revenue stability
- Employee structure and operational dependencies
- Legal compliance and liability
- Systems, processes, and handoff feasibility
This stage becomes much smoother when sellers are organized and responsive. Deals don’t fail only because of bad numbers; many fail because of delays, confusion, or misaligned expectations.
Final takeaway: Sign an LOI that protects your outcome
The LOI is more than a handshake in writing. It’s the framework that shapes diligence, negotiations, and the final agreement.
A strong LOI protects sellers by clarifying structure, limiting risk, setting timelines, and preserving leverage. If you’re reviewing an LOI or expect one soon, now is the time to make sure the terms support the outcome you want.
If you’re preparing to sell or evaluating a Letter of Intent, connect with David Jacobs for a confidential conversation. A well-structured LOI can protect your leverage, reduce surprises, and keep your deal moving toward a clean close.
