What Is a Letter of Intent (LOI) in M&A? A Seller's Perspective
The letter of intent represents the pivotal moment in a sale process. Before an LOI, conversations are exploratory. After signing, the transaction enters a phase of exclusivity, due diligence, and definitive documentation. The terms established in the LOI set expectations that frame everything that follows.
For founders who have never sold a company, the LOI can feel like a formality before the real negotiation begins. This perception is dangerous. The LOI establishes price, structure, timing, and conditions that become difficult to renegotiate once signed. Terms accepted casually at LOI stage often determine what a seller actually receives at closing.
Understanding what belongs in an LOI, what is negotiable, and what market standards look like helps founders protect value before committing to a path that may be difficult to reverse.
What an LOI Actually Is
A letter of intent is a document that outlines the principal terms under which a buyer proposes to acquire a business. It serves as a roadmap for the transaction that will follow if both parties proceed.
The binding versus non-binding distinction is crucial. Most LOIs are structured with certain provisions binding and others non-binding. Price and basic transaction terms are typically non-binding, meaning either party can walk away or renegotiate before signing definitive agreements. Exclusivity, confidentiality, and expense allocation are typically binding, creating legal obligations from the moment of signing.
The non-binding nature of price terms provides flexibility but also creates risk. A buyer who signs an LOI at $50 million can later argue for a lower price based on diligence findings. While significant re-trading is frowned upon, adjustments based on new information are common. Sellers should understand that the LOI price is a starting point for negotiation, not a guaranteed outcome.
Despite the non-binding nature of core terms, the LOI creates powerful psychological anchoring. Once a price is written down and signed, both parties develop expectations around that number. Significant deviations feel like losses rather than neutral negotiation outcomes. The LOI price shapes perceptions even when it lacks legal enforceability.
Key Components From a Seller's Perspective
A comprehensive LOI addresses multiple elements that collectively determine transaction economics. Sellers should understand each component before signing.
Purchase price and enterprise value establish the headline number but require careful interpretation. The stated price may be enterprise value, which requires adjustment for debt and cash to arrive at equity value, or the actual proceeds the seller receives. Confusion between these concepts can create misalignment between buyer and seller expectations.
Consideration structure specifies how the purchase price will be paid. Cash at closing, seller notes, earnouts, equity rollover, and escrow holdbacks all affect what the seller actually receives and when. The same headline price can produce very different outcomes depending on how consideration is structured.
Working capital provisions establish the target level of net working capital to be delivered at closing. If actual working capital falls below the target, the purchase price is reduced. Working capital is complex enough that many LOIs defer detailed terms to definitive documentation, but the basic framework should be understood upfront.
Exclusivity provisions specify the period during which the seller cannot negotiate with other parties. Once exclusivity is granted, the seller loses leverage that comes from competitive alternatives. The length and conditions of exclusivity are among the most important negotiating points at LOI stage.
Conditions to closing specify what must occur before the transaction can complete. Financing contingencies, regulatory approvals, and third-party consents all create execution risk. Understanding what conditions exist and how they might prevent closing helps sellers evaluate deal certainty.
Due diligence scope outlines what the buyer expects to review before closing. More extensive diligence increases the likelihood of findings that could affect price or terms. Sellers should understand the depth of review contemplated and prepare accordingly.
Exclusivity: The Clock That Matters
Exclusivity may be the most consequential term in an LOI from a seller's perspective. Once granted, the seller cannot pursue alternatives regardless of how negotiations proceed.
Exclusivity periods have extended significantly in recent years. Research from Goodwin found that 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, and most had a duration of at least 76 days.
This shift has significant implications for sellers. Extended exclusivity means longer periods without negotiating leverage. If problems arise during diligence, the seller cannot credibly threaten to pursue alternatives. The buyer controls the timeline and can use that control to extract concessions.
Sellers should negotiate exclusivity carefully. Industry practice typically ranges from 45 to 90 days, but shorter periods are preferable. Automatic extensions should be limited or eliminated. Clear milestones should trigger the start of exclusivity periods, not the signing of the LOI. Provisions allowing exclusivity to terminate if certain diligence milestones are not met provide additional protection.
The goal is not to eliminate exclusivity, which buyers reasonably require before investing in due diligence, but to limit its duration and attach conditions that encourage prompt buyer action.
Consideration Structure
How the purchase price is paid matters as much as the headline number. Different consideration types carry different risk profiles that affect the present value of proceeds.
Cash at closing is the most valuable form of consideration. It has no collection risk, no performance conditions, and no dependency on future events. Every dollar paid at closing is worth a full dollar.
Escrow holdbacks reserve a portion of purchase price to secure potential indemnification claims. SRS Acquiom analysis shows that median purchase price adjustment escrow remains at approximately 1 per cent of transaction value. While some portion of the purchase price being held in escrow is standard, the percentage and release conditions affect seller economics. Well-negotiated escrow terms specify clear release triggers and reasonable holdback periods.
Seller notes defer a portion of proceeds into the future, introducing counterparty risk. Axial analysis shows that technology's median seller note percentage is 21 per cent, higher than other sectors. Seller notes are common across transaction types, but the terms matter: interest rate, security position, subordination, and term length all affect the realistic value of deferred consideration.
Earnouts condition payment on future performance metrics. The same SRS Acquiom research found that 68 per cent of deals with earnouts include multiple metrics, adding complexity to achievement and measurement. More importantly, earnouts pay approximately 21 cents per dollar across all deals. A $10 million earnout is realistically worth $2 million in expected value, not $10 million.
Sellers should evaluate the complete consideration structure, not just the headline price. Modelling realistic outcomes under different scenarios reveals the expected value of offers that may appear similar on the surface.
Survival and Post-Close Exposure
The LOI typically establishes parameters for seller liability that extends beyond closing. Understanding these provisions helps sellers evaluate ongoing risk.
Representation and warranty survival periods determine how long buyers can bring claims based on pre-closing statements. SRS Acquiom data shows that the median survival period held steady at 12 months. This benchmark provides useful context: a buyer requesting 24-month survival is asking for terms that exceed market practice.
Indemnification provisions specify what types of claims can be made and how they are resolved. Basket thresholds require claims to accumulate to a certain level before becoming payable. Cap limitations restrict the maximum amount of indemnification the seller can owe. Understanding these provisions at LOI stage, even if details are deferred to definitive documentation, helps sellers anticipate post-closing exposure.
Escrow and holdback provisions interact with indemnification. Money held in escrow is available to satisfy claims without requiring the seller to write cheques post-closing. While the median escrow of 1 per cent of transaction value provides limited security, some transactions involve larger holdbacks that significantly affect seller proceeds.
Sellers should understand the interplay between survival periods, indemnification limits, and escrow provisions. Together, these determine the seller's exposure to post-closing claims and the realistic risk that proceeds will be clawed back.
What to Negotiate Before Signing
The time to negotiate LOI terms is before signing, not after. Several areas deserve particular attention.
Exclusivity length and conditions should be negotiated to the minimum period the buyer genuinely needs. Push for shorter periods, resist automatic extensions, and negotiate termination rights if buyer milestones are not met. The dramatic increase in exclusivity periods documented by Goodwin suggests buyers are successfully extending these terms; sellers should push back.
Consideration structure merits careful evaluation. Understand the realistic value of each component. Push for more cash at closing and less deferred or contingent consideration where possible. If earnouts are proposed, negotiate simple metrics based on factors the seller can influence and reasonable targets based on historical performance.
Working capital framework should be established even if details are deferred. Understand the proposed target level, calculation methodology, and dispute resolution process. Working capital adjustments transfer significant value in most transactions; ensuring the framework is fair at LOI stage prevents problems later.
Conditions to closing should be identified and evaluated. Understand what approvals are required, what financing contingencies exist, and what could prevent closing. Conditions that seem remote can materialise; assessing deal certainty requires understanding all the ways a transaction might fail to close.
Timeline expectations should be explicit. Establish target dates for due diligence completion, definitive documentation, and closing. While these dates are typically non-binding, they create accountability and help identify whether the buyer is proceeding at an appropriate pace.
The LOI sets the parameters for everything that follows. Terms accepted casually or without negotiation become anchors that are difficult to move. Founders who approach the LOI as a serious negotiation rather than a formality protect value throughout the remainder of the transaction.
If you are about to receive or evaluate a letter of intent and want to understand what terms deserve attention, we would welcome a confidential conversation about what you should expect and how to negotiate effectively.