A Letter of Intent (LOI) is a non-binding document that outlines the key terms and conditions of a proposed business acquisition. While most LOI terms are non-binding, they set the framework for the definitive purchase agreement and can significantly impact the final deal structure.
Receiving an LOI is exciting — it means a buyer is serious. But not all offers are created equal. Understanding which terms matter most can be the difference between a smooth closing and a painful negotiation.
Key LOI Terms Every Seller Should Understand
Purchase Price and Structure
The headline number gets all the attention, but how the price is structured matters just as much as the amount. Common structures include:
- All cash at closing — The simplest and most favorable for sellers. You receive the full amount on day one.
- Seller financing — The buyer pays a portion at closing and the remainder over time (typically 3-7 years). This increases risk for the seller but can expand the buyer pool.
- Earnouts — A portion of the purchase price is contingent on the business hitting future performance targets. Earnouts transfer risk to the seller and are one of the most contentious deal terms.
- Equity rollover — You retain a percentage of ownership in the business post-closing. Common in private equity transactions.
A $5M all-cash offer is often more valuable than a $6M offer with a $2M earnout and seller financing. Always evaluate the risk-adjusted present value of the total consideration.
Working Capital
Most LOIs include a working capital target — the amount of current assets (minus current liabilities) that stays with the business at closing. If your actual working capital at closing is below the target, the purchase price is reduced dollar-for-dollar.
This is one of the most commonly misunderstood terms in M&A. Pay close attention to how working capital is defined and whether the target is reasonable based on your historical norms.
Exclusivity (No-Shop) Period
Exclusivity is one of the few binding provisions in most LOIs. It prevents you from soliciting or entertaining other offers during a specified period — typically 60 to 120 days.
Shorter exclusivity periods give you more leverage. If the buyer can't close within the agreed timeframe, you regain your ability to pursue other options. Be cautious of exclusivity periods longer than 90 days, and negotiate clear conditions for early termination.
Representations and Warranties
While the specific reps and warranties are negotiated in the definitive agreement, LOIs sometimes outline the general scope. Key areas include accuracy of financial statements, ownership of assets, absence of undisclosed liabilities, and compliance with laws.
Broader representations increase your post-closing exposure. A good M&A advisor will help you negotiate reasonable limitations.
Indemnification
Indemnification provisions determine your financial exposure after the sale closes. Watch for:
- Indemnification cap — The maximum amount you could owe post-closing (typically 10-25% of the purchase price).
- Basket/deductible — The threshold of claims before indemnification kicks in.
- Survival period — How long after closing can the buyer make claims (typically 12-24 months for general reps).
- Escrow — A portion of the purchase price held in escrow to secure indemnification obligations.
Red Flags in an LOI
- Unusually long exclusivity. More than 90 days suggests the buyer may not have financing lined up or is using exclusivity to keep you off the market.
- Vague earnout terms. If the LOI references an earnout without clear metrics, measurement periods, and dispute resolution, it's a negotiation trap.
- No financing contingency clarity. If the buyer needs financing, the LOI should specify the status of their funding and what happens if financing falls through.
- Excessive due diligence scope. A buyer asking for everything including personal tax returns, customer contracts, and employee records before signing an LOI may be fishing for information.
- Non-standard provisions. Any term that seems unusual for your deal size or industry deserves close scrutiny from your legal counsel.
How to Compare Multiple LOIs
If you're fortunate enough to receive multiple offers, comparing them side-by-side is critical. Beyond the purchase price, evaluate each offer on:
- Cash at closing vs. deferred consideration
- Earnout risk and achievability
- Working capital treatment
- Non-compete terms and duration
- Transition period requirements
- Buyer's track record of closing deals
- Cultural fit and plans for employees
SellSideHQ's LOI Analysis tool uses AI to evaluate every term from a seller-friendly perspective, providing risk assessments and recommendations. If you have multiple offers, our LOI Comparison tool helps you compare them side-by-side with detailed scoring.
Before evaluating any offer, make sure you understand how your business is valued so you can assess whether the proposed price reflects fair market value.