Inside an LOI: Price, Structure, Exclusivity, and Hidden Risk
When a founder receives a Letter of Intent, the natural instinct is to focus on the number at the top of the page. The enterprise value, the implied multiple, the headline that will define the transaction. But experienced sellers know that the LOI is a complex document where the real economics often hide in terms that seem technical and secondary.
The gap between the headline price and what a seller actually receives can be substantial. Working capital adjustments, escrow holdbacks, earnout provisions, and survival periods all affect the final outcome. Founders who negotiate these terms poorly often close transactions that bear little resemblance to what they thought they agreed to at LOI stage.
Understanding the anatomy of an LOI is essential for anyone preparing to sell a business. This is where leverage shifts, where economics crystallise, and where deals are won or lost.
The LOI as Economic Framework
A Letter of Intent establishes the economic and procedural framework for a transaction. While technically non-binding on price and most terms, the LOI creates strong precedent. Attempting to renegotiate terms established at LOI stage requires either substantial justification or a credible alternative buyer.
The key economic terms in most LOIs include enterprise value, the bridge to equity value, working capital target, earnout provisions, escrow and indemnification terms, and the survival period for representations and warranties. Each of these affects what the seller actually receives.
Beyond economics, the LOI typically includes binding provisions on exclusivity and confidentiality. The exclusivity period prevents the seller from soliciting or negotiating with other buyers during diligence. This is the buyer's primary protection against being used as a stalking horse, and it represents significant leverage transfer from seller to buyer.
Exclusivity: The Clock That Favours Buyers
Exclusivity is perhaps the most consequential non-economic term in an LOI. Once granted, it removes the seller's most powerful negotiating tool: the credible threat of pursuing alternatives.
The duration of exclusivity has expanded significantly in recent years. According to research from Goodwin, in 2021, only about 6 per cent of deals that involved exclusivity periods had a duration of 61 days or more. By 2022, nearly 40 per cent had a duration of 61 days or more, with most having a duration of at least 76 days. This shift reflects buyers using the uncertain deal environment to extract longer commitment periods.
For sellers, longer exclusivity creates risk. Markets can shift, business performance can change, and alternative buyers who expressed interest may move on to other opportunities. A 90-day exclusivity period that extends through a difficult quarter can leave a seller with a deteriorating negotiating position and no alternatives.
Negotiating exclusivity requires understanding the trade-off between buyer comfort and seller flexibility. A buyer needs enough time to complete diligence and financing. A seller needs to maintain leverage and limit exposure to market or performance changes. The right duration depends on deal complexity, buyer type, and the competitive dynamics of the process.
Many advisors recommend building in extension triggers rather than granting extended periods upfront. An initial 45-day exclusivity with automatic extensions tied to buyer progress milestones gives the buyer confidence while preserving seller optionality if the buyer fails to perform.
Working Capital: The Hidden Price Adjustment
Working capital adjustment is the mechanism most likely to surprise unprepared sellers. SRS Acquiom's analysis confirms that working capital purchase price adjustments are now virtually ubiquitous, present on more than 90 per cent of private target M&A deals in recent years.
The concept is straightforward in principle. A business needs a certain level of working capital to operate. The buyer acquires not just the enterprise but the working capital required to run it. If actual working capital at closing differs from the target specified in the LOI, the purchase price adjusts accordingly.
The complexity emerges in measurement and negotiation. What items are included in working capital? How are normalisation adjustments calculated? What happens if buyer and seller disagree on the final number? These questions can generate disputes worth millions of dollars.
Common pitfalls for sellers include accepting a target based on a single month-end balance rather than an average, failing to account for seasonal patterns that inflate or deflate working capital at certain points in the year, and not understanding which line items will be contested during closing.
Founders should understand their working capital patterns deeply before entering LOI negotiations. What is the true normalised level of working capital required to operate the business? How does it vary by month, quarter, or season? What adjustments will buyers likely propose, and are they justified? Engaging financial advisors early to analyse working capital prevents surprises at closing.
Escrow and Survival: Your Money at Risk
Most transactions include an escrow arrangement where a portion of proceeds is held back to cover potential indemnification claims. If the seller's representations prove false or undisclosed liabilities emerge, the buyer can claim against the escrow rather than pursuing the seller directly.
SRS Acquiom data shows that the median escrow for purchase price adjustment purposes remains at approximately 1 per cent of transaction value. However, general indemnification escrows can be substantially larger, often in the 10 to 20 per cent range for mid-market transactions. These amounts remain at risk until the survival period expires and any claims are resolved.
The survival period determines how long buyers can bring claims against the seller's representations. The median survival period has held steady at 12 months, meaning sellers may have funds at risk for a full year after closing. Some representations, particularly those related to taxes, employee benefits, and environmental matters, often survive longer.
For sellers, the key negotiation points are minimising escrow size, limiting survival periods, establishing deductible or basket thresholds that prevent nuisance claims, and capping aggregate liability to prevent catastrophic exposure.
The trade-off is typically price. Buyers who accept smaller escrows, shorter survival periods, and higher thresholds may demand a discount to the headline value. Sellers must evaluate whether the certainty of reduced holdback is worth the reduction in upfront price.
No-Survival Deals: A Growing Trend
One significant development in recent years is the rise of no-survival deal structures. According to SRS Acquiom, 33 per cent of 2024 deals were structured as no-survival, meaning the buyer has no post-closing recourse against the seller for breaches of representations and warranties.
No-survival deals shift the risk of undisclosed issues entirely to the buyer or, increasingly, to representations and warranties insurance policies. Buyers purchase these policies from insurers who assume the risk in exchange for a premium. The effect is cleaner economics for the seller and more certainty about what they will actually receive.
For sellers, no-survival structures are attractive. There is no money held in escrow, no extended period of potential liability, and no risk of post-closing disputes eroding transaction value. The trade-off is that buyers may pay slightly less to account for the risk they are assuming or the cost of insurance they must purchase.
Whether a no-survival structure is available depends on deal characteristics, insurance market conditions, and buyer preferences. Sellers should understand this option and evaluate whether pursuing it makes sense for their transaction.
Earnouts: The Price You May Never Receive
Earnouts tie a portion of the purchase price to post-closing performance. They bridge valuation gaps when buyer and seller disagree about future prospects. The seller believes the business will achieve certain targets; the buyer is uncertain. An earnout lets the seller participate in the upside they expect while giving the buyer downside protection.
The problem with earnouts is that they frequently underperform expectations. Historical data shows that earnouts pay significantly less than their face value on average. Multiple metrics, complex measurement periods, and the seller's reduced control over business decisions all contribute to this shortfall.
SRS Acquiom analysis indicates that 68 per cent of deals with earnouts include multiple earnout metrics, adding complexity to measurement and increasing opportunities for dispute.
When evaluating an LOI with an earnout component, sellers should heavily discount the expected value of the earnout in their analysis. They should scrutinise the metrics, measurement methodology, and the degree of control they will retain over decisions that affect earnout achievement. A $50 million headline price with a $10 million earnout is not equivalent to a $60 million all-cash offer.
The Timeline Between Signing and Closing
The period between signing an LOI and closing a transaction can be longer than founders expect. BCG research found that approximately 40 per cent of transactions take longer to close than the timeline estimated in the deal announcement, with nearly two-thirds of delayed deals requiring an additional three months or more.
For larger transactions, the averages are even more extended. The period from signing to closing for deals exceeding $2 billion increased by 11 per cent from 2018 to 2022, reaching an average of 191 days. While smaller transactions typically move faster, the trend toward longer timelines affects deals of all sizes.
This timeline has practical implications. Business performance must be maintained throughout, which means founders cannot check out mentally once an LOI is signed. Financing contingencies may still need to be satisfied. Regulatory approvals, customer consents, and third-party agreements all take time. Founders who plan personal events around optimistic closing dates often find themselves adjusting expectations.
Negotiating From Strength
The LOI negotiation determines the framework for everything that follows. Mistakes made here compound through closing and beyond. Several principles guide effective LOI negotiation.
First, maintain competitive tension as long as possible. The threat of alternatives is the seller's primary leverage. Engaging multiple buyers through the LOI stage, or at least credibly signalling that alternatives exist, creates pressure that improves terms.
Second, understand the relative importance of each term. Some provisions are standard industry practice; others represent overreach. Some can be traded against price; others cannot. Advisors with substantial transaction experience can identify which battles matter.
Third, model the economics completely. What will you actually receive after working capital adjustments, escrow holdbacks, and earnout uncertainty? How does that compare across different offers? The highest headline price does not always produce the best outcome.
Fourth, consider post-closing obligations. Transition periods, non-competes, consulting arrangements, and earnout involvement all require your time and commitment after closing. These should be evaluated alongside economic terms.
If you are evaluating an LOI or preparing to receive one, we would be happy to discuss how these terms might apply to your specific situation.