The letter of intent is one of the most important documents in any M&A transaction, yet many founders treat it as a preliminary formality — a handshake agreement that will be refined later in the definitive purchase agreement. This is a costly misunderstanding. While most LOI provisions are technically non-binding, they establish the framework and negotiating leverage for every subsequent discussion. Terms that are not addressed in the LOI become exponentially harder to negotiate once exclusivity is granted and the buyer controls the process timeline.
The purchase price and its structure deserve careful scrutiny. A headline number of ten million dollars means very different things depending on whether it is all cash at closing, includes a two-million-dollar earnout contingent on future performance, carries a seller note with deferred payments, or is subject to significant working capital adjustments. Founders should understand exactly how the purchase price will be paid, when, and under what conditions.
Exclusivity — the no-shop provision — is perhaps the single most important leverage point in the LOI. Once you sign an exclusivity period, you have agreed not to talk to other buyers for a defined window, typically 60 to 90 days. This gives the buyer significant power: they know you cannot create competitive pressure during this period. The length, terms, and any conditions for breaking exclusivity should be negotiated carefully. Shorter exclusivity periods with clear milestones preserve the seller's leverage.
The LOI should clearly define the scope of due diligence. Buyers will naturally want broad access, but founders can and should negotiate reasonable boundaries. Specifically, the timing of sensitive disclosures — like notifying key customers, employees, or vendors — should be controlled by the seller until appropriate points in the process. Premature disclosure of a pending sale can destabilize a business in ways that are difficult to reverse.
Working capital definitions in the LOI are frequently vague, often intentionally so. Buyers may include language referencing a 'normal' or 'customary' level of working capital without defining what that means. This creates a significant area of exposure for sellers. Founders should push for a defined working capital target or peg — based on a trailing average — at the LOI stage. Deferring this discussion to the purchase agreement negotiation gives the buyer the advantage of momentum and sunk costs.
Employment and transition terms for the founder should be addressed, even if only at a high level. If the buyer expects the founder to remain with the business post-closing, the terms of that employment — compensation, duration, role, and reporting structure — should be outlined. Discovering in the purchase agreement stage that the buyer expects a three-year full-time commitment with restrictive non-compete provisions, when the founder was planning a six-month transition, creates friction that can derail the deal.
Indemnification and escrow provisions are often mentioned briefly in the LOI but have major economic consequences. The percentage of the purchase price held in escrow, the duration of the escrow period, and the threshold for indemnification claims all directly affect the seller's net proceeds. Founders should understand these terms and negotiate them at the LOI stage when competitive leverage still exists.
Representations and warranties, while detailed in the definitive agreement, should be bounded in the LOI. If a buyer expects extensive R&W coverage, including fundamental representations with unlimited survival periods, the seller should know that before granting exclusivity. Some LOIs include language about expected R&W insurance, which can significantly reduce the seller's post-closing exposure.
The best LOI negotiations happen when the seller has multiple interested parties. Competition creates leverage, and leverage creates favorable terms. This is one of the primary reasons a structured sale process — with multiple buyers engaged simultaneously — produces better outcomes than a single-party negotiation. Your advisor should be orchestrating this dynamic well before the LOI stage.
Treat the LOI as though it were binding, even where it is not. The terms you accept will anchor every subsequent negotiation. Invest the time, engage your legal counsel, and negotiate from a position of preparation and strength.