Letter of Intent (LOI) Explained: A Seller's Guide

Here's something I tell every seller who hasn't been through a deal before: the letter of intent is where the negotiation happens. Not at closing. Not during due diligence. The LOI. By the time you sign a definitive purchase agreement, 90% of the economics and structure have already been decided — at the LOI stage.

Yet most sellers treat the LOI as a formality — a handshake before the "real" legal work begins. That misunderstanding costs sellers hundreds of thousands of dollars every year. Once you grant a buyer exclusivity, your leverage drops dramatically, and every term you didn't nail down in the LOI becomes a concession the buyer extracts during diligence.

What an LOI Actually Is

A letter of intent (also called a term sheet or indication of interest, depending on the stage) is a document that outlines the principal terms of a proposed acquisition. It's typically 5-15 pages long and covers purchase price, deal structure, key conditions, and the process for moving to a definitive agreement.

The critical concept: most of the LOI is non-binding. The purchase price, structure, representations, and most other economic terms are explicitly stated as non-binding — meaning either party can walk away. But certain provisions are binding, and these are the ones that create real obligations.

Binding vs. Non-Binding Provisions

Binding Provisions (You Cannot Walk Away From These)

• Exclusivity (no-shop): You agree not to solicit, negotiate with, or provide information to other potential buyers for a specified period. This is the most consequential binding term in the LOI.
• Confidentiality: Both parties agree to keep the transaction and all shared information confidential. Usually references a separate NDA already in place.
• Expense allocation: Each party bears its own costs. Some LOIs include break-up fees, but these are rare below $50M.
• Governing law: Which state's laws control the LOI. Seemingly trivial, but it matters if there's a dispute over the binding provisions.

Non-Binding Provisions (Subject to Diligence and Definitive Agreement)

• Purchase price and form of consideration
• Deal structure (asset vs. stock sale)
• Working capital mechanism and peg
• Earn-out terms
• Employment and non-compete requirements
• Representations and warranties framework
• Indemnification structure
• Closing conditions

The non-binding nature of economic terms is both a protection and a risk. It protects you because you're not locked into a bad deal. But it also means the buyer can "retrade" — come back during diligence and say, "We found X, so we need to reduce the price by $500K." This happens more often than sellers expect.

The Key Terms You Must Get Right

Purchase Price and Consideration

The headline number matters less than how it's paid. A $10M offer with $8M at closing and a $2M earn-outis worth less than a $9M all-cash offer, because earn-outs are inherently uncertain. I always tell sellers to apply a 50% discount to earn-out components when comparing offers — if you treat the earn-out at face value, you'll pick the wrong buyer.

Also watch for: seller notes (you're financing part of the deal), equity rollover (you keep a minority stake in the acquiring entity), and escrow holdbacks (10-15% of the price held in escrow for 12-18 months to cover indemnification claims).

Asset Sale vs. Stock Sale

This structural decision has massive tax implications — often $300K-$700K on a $5M deal. Buyers almost always prefer asset sales (they get a step-up in tax basis). Sellers almost always prefer stock sales (capital gains treatment on the entire amount). The LOI is where this gets decided. If you let the buyer dictate asset vs. stock without negotiation, you're leaving significant money on the table.

Working Capital

The working capital mechanismis the provision most sellers gloss over — and the one that most frequently reduces the effective purchase price after closing. The LOI should specify: the definition of working capital, the peg (target amount), the measurement methodology, and whether there's a collar (minimum deviation before an adjustment kicks in). If these aren't in the LOI, the buyer will define them in the purchase agreement — and not in your favor.

Employment and Non-Compete

Most LOIs require the seller to stay on for a transition period — 6 months to 3 years depending on the buyer type. PE buyers typically want 2-3 years because they need you to run the business. Strategic buyers might only need 6-12 months for a knowledge transfer. The LOI should specify: duration, compensation, title/role, and what happens if you're terminated early.

The non-compete is equally important. Standard terms are 3-5 years within a defined geography and industry. Push back on overly broad non-competes that would prevent you from doing anything in your field for half a decade. Courts increasingly disfavor broad non-competes, but you don't want to litigate — you want to negotiate it correctly upfront.

The Exclusivity Trap

Exclusivity is the buyer's most valuable tool. Once you grant it, you've taken your business off the market. Other interested buyers go cold. Your advisor can't maintain competitive tension. And the clock starts ticking on a period during which the buyer has every incentive to slow-play diligence and renegotiate terms.

Standard exclusivity periods: 45-75 days for lower middle market deals ($5-25M). 60-90 days for larger transactions. Anything beyond 90 days should be a non-starter without very specific justification (regulatory approvals, complex carve-out diligence).

What I negotiate for sellers:

• 45-60 day initial period with a possible 15-day extension if the buyer is acting in good faith and diligence is substantially complete.
• Milestones tied to exclusivity. The buyer must provide a draft purchase agreement by Day 30 and complete financial diligence by Day 45. If they miss milestones, exclusivity terminates automatically.
• Good faith provision. If the buyer retrades on price by more than 5-10% without a material diligence finding, exclusivity terminates.

The worst outcome is a buyer who drags out exclusivity for 90+ days, finds minor issues in diligence, and uses them to justify a 15-20% price reduction — knowing you've been off the market for three months and your other buyers have moved on. Tight exclusivity with milestones is the best defense.

What to Negotiate Hard On vs. What's Standard

Sellers have limited negotiating capital. Spend it wisely.

Fight hard on these:

• Purchase price (obviously)
• Cash at closing vs. deferred consideration (earn-outs, seller notes, escrow)
• Asset vs. stock structure
• Working capital peg and definition
• Exclusivity duration and termination triggers
• Non-compete scope and duration

Accept standard market terms on these:

• Representations and warranties — these are detailed in the purchase agreement, not the LOI. A standard framework ("customary reps and warranties") is fine at the LOI stage.
• Indemnification caps — typically 10-20% of purchase price for general indemnification, with specific carve-outs for fraud and fundamental representations.
• Escrow amount — 10-15% for 12-18 months is market. Don't waste capital fighting 10% vs 12%.
• Closing conditions — buyer's completion of satisfactory due diligence and execution of definitive agreements are standard and expected.

A Real-World LOI Timeline

Here's what a typical lower middle market deal looks like from LOI to close. Understanding this timeline helps you plan around your business operations and manage expectations.

In reality, most lower middle market deals take 60-90 days from signed LOI to close. Add delays for financing issues, diligence discoveries, or complex legal negotiations, and 90-120 days is common. I always tell sellers to plan for 90 days and hope for 60.

Multiple LOIs: Managing a Competitive Process

The ideal scenario is receiving 2-3 LOIs simultaneously. This gives you leverage to negotiate better terms, play buyers against each other, and select not just the highest price but the best overall package (certainty of close, structure, cultural fit, transition requirements).

When comparing multiple LOIs, I build a matrix that includes: cash at closing, total consideration (discounting earn-outs by 50%), deal structure tax impact, working capital risk, employment obligations, non-compete restrictions, and certainty of close (does the buyer have financing lined up?). The highest headline price wins the comparison roughly 60% of the time — meaning 40% of the time, a lower-priced offer is actually the better deal once you account for structure, taxes, and risk.

When Buyers Retrade After the LOI

A retrade is when the buyer reduces the purchase price or changes material terms after signing the LOI, using diligence findings as justification. It happens in roughly 30-40% of lower middle market transactions, and it's the most frustrating experience a seller can have.

The best defense against retrades is a sell-side quality of earnings reportcompleted before going to market. When the buyer's diligence confirms your numbers (because you already had them validated), there's nothing to retrade on. The $30,000-$50,000 you spend on a sell-side QofE is cheap insurance against a $500K retrade.

The Bottom Line

The LOI is not a formality — it's the most consequential document in the entire deal process. Every dollar you don't negotiate at the LOI stage becomes a dollar you fight for (and usually lose) during purchase agreement negotiations. Treat the LOI with the same seriousness you'd treat the closing documents, because by the time you get to closing, the LOI has already decided most of the outcome.