Strategic vs Financial Buyers: How Deal Terms Differ at LOI Stage
When founders receive letters of intent from different buyer types, the headline price naturally draws attention. A $50 million offer from a strategic acquirer sits next to a $45 million offer from a private equity firm, and the comparison seems straightforward. The strategic buyer is offering more.
This comparison misses the point. The letter of intent establishes structure as much as price, and structural differences between buyer types can dramatically affect what founders actually receive. Seller financing requirements, earnout provisions, rollover expectations, and working capital mechanisms all vary systematically by buyer type. Two offers with identical headline prices can produce outcomes differing by millions of dollars once these terms are fully modelled.
Understanding how deal terms differ at LOI stage helps founders compare offers on an apples-to-apples basis and negotiate from informed positions rather than reacting to surface-level numbers.
Beyond the Price Tag: Why LOI Structure Matters
The gap between headline price and actual proceeds emerges from multiple structural elements that vary across buyer types. Each element represents value that may or may not materialise, and the probability of realisation differs significantly.
Cash at closing is the most certain component. Money wired at closing has no collection risk, no performance conditions, and no dependency on future events. Everything else in the deal structure involves some degree of uncertainty.
Seller financing defers a portion of proceeds into the future, introducing counterparty risk. If the buyer fails to perform, the seller may need to pursue collection through legal means or accept a loss. The risk is real: buyers who cannot obtain full financing from third-party sources are asking sellers to accept risk that professional lenders declined.
Earnouts condition payment on future performance metrics that the seller may no longer control. Post-closing decisions about resource allocation, pricing, strategy, and investment all affect earnout achievement, and those decisions will be made by the buyer, not the seller.
Equity rollover in PE transactions converts cash proceeds into equity in the post-closing entity. The value of that equity depends on future performance and exit timing, neither of which the seller controls.
Academic research shows strategic buyers pay premiums of approximately 46.4 per cent above recent trading value, compared to 36.5 per cent for financial buyers in auction processes. Analysis by Focus Bankers demonstrates this 10 percentage point gap. But when seller financing, earnouts, and rollover are factored in, the net present value of actual proceeds may tell a different story than headline price suggests.
Seller Financing by Buyer Type
Seller financing requirements vary systematically by buyer type. Analysis of 100 letters of intent by Axial reveals the pattern.
Family offices request the highest median seller note at 18.18 per cent of deal value. These buyers often have significant capital but prefer to preserve liquidity across multiple investments. They may also value the alignment that seller notes create, particularly for businesses where founder relationships drive ongoing value.
Independent sponsors and search funds both show median seller notes of 16.67 per cent. These buyers typically raise capital deal by deal and rely on seller notes to complete their financing structures. Founders selling to independent sponsors should expect seller financing as a standard, non-negotiable component of the transaction.
Private equity firms request median seller notes of 13.59 per cent. While lower than independent sponsors, the seller financing requirement is still material. PE buyers have more financing options but use seller notes to enhance returns and create transition alignment.
Corporate strategic buyers come in lowest at 11.76 per cent. These buyers typically have balance sheet capacity to fund acquisitions directly and less need for seller participation in the capital structure.
The practical implication is significant. A $50 million offer from a family office with 18 per cent seller financing means $41 million at closing and $9 million deferred. A $48 million offer from a corporate strategic with 12 per cent seller financing means $42.2 million at closing and $5.8 million deferred. The strategic offer has a lower headline price but delivers more cash at closing and less exposure to collection risk.
Earnout Terms and Reality
Earnouts appear in LOIs from both strategic and financial buyers, though often for different reasons. Regardless of buyer type, founders should approach earnout consideration with appropriate scepticism.
SRS Acquiom analysis shows that earnouts pay approximately 21 cents per dollar across all deals. When earnouts do pay, about half of maximum earnout dollars are paid when any achievement occurs. These statistics apply across buyer types and should inform how founders value earnout consideration.
The same research found that 68 per cent of deals with earnouts include multiple metrics. Complex earnout structures with multiple targets create additional opportunities for partial achievement, missed milestones, and disputed calculations. The more complex the earnout, the more difficult it becomes to predict outcomes and the more potential friction exists in the post-closing relationship.
Strategic acquirers may include earnouts to bridge valuation gaps or align seller incentives with integration success. However, post-acquisition integration decisions affect earnout achievement in ways sellers no longer control. If the acquirer redirects sales resources, changes product strategy, or alters operations in ways that affect performance metrics, earnout targets become more difficult to hit.
Financial sponsors may include earnouts to align management incentives with growth plans. Because PE firms typically maintain operational independence, founders may retain more control over earnout achievement. However, extended hold periods of six years or more mean earnout periods can stretch across multiple years with payment uncertain throughout.
The appropriate discount for earnout consideration is substantial. A $10 million earnout should be valued at perhaps $2 million to $3 million in expected value terms. Offers that rely heavily on earnout consideration should be compared to all-cash alternatives with appropriate probability weighting.
The PE Structure Playbook
Private equity LOIs follow recognisable patterns that founders should understand before negotiating.
Equity rollover is nearly universal in PE transactions. Sponsors want management to retain meaningful ownership, typically 20 to 40 per cent of equity, to create alignment through the hold period. The rollover is not optional; it is a core element of the PE model. Founders unwilling to roll equity will find PE buyers much less interested.
The value of rolled equity depends on future performance and exit timing. According to data tracked by S&P, average holding periods for buyout deals reached 6.4 years in 2025. The median holding period for PE-backed companies hit an all-time high of seven years in 2023. Founders should evaluate rolled equity with these time horizons in mind, recognising that money received in six to seven years is worth substantially less than money received today.
Working capital targets in PE LOIs often receive insufficient attention. The target establishes a normalised level of working capital that must be delivered at closing. If actual working capital falls below the target, the purchase price is reduced dollar for dollar. PE firms with experience across many transactions understand working capital mechanics thoroughly; founders encountering them for the first time often do not.
Management agreements accompany PE LOIs because sponsors want assurance that key executives will remain post-closing. Employment terms, compensation packages, and non-compete provisions are typically negotiated alongside the core transaction. Founders should understand these agreements as part of the overall deal structure, not as separate matters to be addressed later.
The Strategic Structure Playbook
Strategic acquirer LOIs tend toward simpler structures with different points of complexity.
Higher cash consideration reflects the strategic buyer's typical preference for clean transactions. Strategic acquirers have balance sheets to fund acquisitions and less need to optimise capital structure through seller financing or equity rollover. The lower seller financing percentage documented in Axial data confirms this pattern.
Integration conditions replace equity alignment mechanisms. Strategic acquirers care less about ongoing founder involvement and more about successful integration. LOIs may include conditions around employee retention, customer contract assignments, technology migration, and operational transition. These conditions create execution risk even when financing is not contingent.
Regulatory and approval conditions appear more frequently in strategic LOIs. Corporate acquirers may need board approval, antitrust clearance, or other authorisations that introduce timeline uncertainty. While PE firms typically have delegated authority to close transactions within certain parameters, strategic buyers often face approval processes that can delay or derail deals.
Shorter transition periods reflect the strategic buyer's goal of integration rather than partnership. Where PE firms want founders engaged for extended periods, strategic acquirers often prefer efficient knowledge transfer followed by founder departure. This difference affects earnout structures, post-closing employment, and non-compete terms.
The relative simplicity of strategic LOIs can be misleading. While fewer moving parts exist in the deal structure, the integration conditions and approval requirements can be just as consequential for deal certainty as the financing contingencies in PE transactions.
Negotiating From Strength at LOI
Understanding buyer-type patterns helps founders negotiate more effectively, but leverage ultimately comes from competitive dynamics, not knowledge alone.
Research from Focus Bankers demonstrates that competitive sales processes can result in 50 to 100 per cent increases in offers compared to proprietary sales. This uplift reflects the value of having alternatives. A founder negotiating with a single buyer has no credible threat; a founder with multiple interested parties can push for better terms because walking away from one buyer does not end the process.
Seller financing is more negotiable than buyers suggest. While family offices and independent sponsors may present seller notes as essential to their financing structure, the specific percentage, interest rate, security provisions, and subordination terms are all negotiable. Founders with competitive alternatives can push seller financing percentages down, improve security interests, and negotiate better terms on subordination.
Earnout metrics should be negotiated carefully. Simpler metrics with fewer conditions and clearer calculation methodology improve the probability of achievement and reduce post-closing disputes. Founders should push for metrics they can influence, reasonable targets based on historical performance, and clear definitions that leave little room for interpretation.
Working capital targets deserve serious attention. The target should reflect normalised working capital, not a single month-end snapshot that may be unusually high or low. Founders should understand the calculation methodology, ensure appropriate definitions, and negotiate dispute resolution mechanisms that protect against aggressive buyer interpretations.
The foundation for effective negotiation is realistic comparison across offers. Modelling actual proceeds under different scenarios, including probability-weighted earnout outcomes and discounted future payments, reveals which offer truly delivers the best value. Headlines mislead; careful analysis illuminates.
If you are evaluating LOIs from different buyer types and want help modelling actual proceeds across different structures, we would welcome a confidential conversation about how to compare offers effectively.