The Letter of Intent (LOI) in a Business Sale: What to Negotiate

The LOI is the single most consequential document in a business sale. It looks like a placeholder — most provisions are explicitly non-binding — but it sets the terms of every conversation that follows. Sellers who treat it as a formality routinely give up six- and seven-figure value.

Why the LOI matters more than it looks

Two things happen when you sign an LOI:

1. The buyer gets exclusivity. You can’t talk to other buyers, can’t accept competing offers, and can’t relist if this deal stalls. You typically commit to 60–90 days of locked-up time.
2. Your leverage drops to its lowest point in the entire process. From signing onward, the buyer is the only party at the table. Every diligence finding becomes a renegotiation opportunity. Every delay costs you.

Because of this, every material term you don’t pin down in the LOI gets pinned down on the buyer’s terms later. Re-trading after LOI is the rule, not the exception — but it’s much harder when the LOI was specific.

The 10 LOI provisions that matter

1. Purchase price

The number is obviously important, but how it’s expressed matters too. Specify:

• Total enterprise value and how it’s adjusted (cash, debt, working capital).
• Whether the price is asset sale or stock sale — these have very different tax outcomes.
• Whether it’s a fixed price or subject to financial confirmation.

2. Payment structure

How and when you get paid is often more important than the headline number.

• Cash at close: the most certain dollars. Maximize this.
• Seller note: you finance part of the deal. Common in SBA deals (10% standby seller note) and PE deals. Negotiate interest rate, term, default provisions, and standstill terms with the senior lender.
• Earnout: payment based on post-close performance. Resist when possible; negotiate hard when accepted.
• Equity rollover: you keep a stake in the new entity. Common with PE; can deliver real second-bite value but creates minority shareholder risk.

A $5M deal that’s 60% cash, 20% seller note, 20% earnout is very different from a $5M deal that’s 100% cash at close — even though the headline numbers match.

A seller note also has tax implications worth modeling before you accept or reject one: the IRS installment sale method lets you spread capital gains recognition over the note term rather than paying it all at closing, which can meaningfully improve your net after-tax return. Use the Seller Financing Calculator to run your specific numbers before structuring this in the LOI.

3. Working capital target

This is where sellers most often lose money they didn’t expect to lose. The buyer expects a “normal” level of working capital to come with the business. If your actual closing working capital is below that level, your purchase price is reduced dollar-for-dollar.

Negotiate:

• A specific, defined dollar target (not a vague “normalized” reference).
• The calculation method, including which items are in or out (cash, deferred revenue, customer deposits).
• A reasonable peg-to-trailing-average period (12 months, normalized for seasonality).
• A collar that minimizes adjustments below a threshold.

4. Exclusivity (no-shop)

You’re committing to negotiate only with this buyer for a defined period. Limit it.

• 30–60 days is standard for cash deals.
• 75–90 days for SBA-financed deals.
• Pair with milestones — buyer must launch diligence within 7 days, secure financing within 30 days, and commence definitive agreement drafting within 45 days.
• Carve out unsolicited offers (you can listen but not pursue) and existing strategic conversations.

5. Reps, warranties, and indemnification

The full reps and warranties package gets negotiated in the definitive agreement, but the LOI should set high-level parameters:

• Survival period — how long reps survive closing (12–24 months for general; longer for tax and fundamental).
• Cap and basket — maximum indemnification (often 10–15% of price) and minimum claim threshold.
• Escrow holdback percentage and duration (often 10% for 12–18 months, sometimes replaced by R&W insurance).

6. Closing conditions

Specify what must be true for closing to happen:

• Financing commitment in hand.
• Material consents obtained (lease assignment, key customer consents, regulatory approvals).
• No material adverse change.
• Specified diligence completed satisfactorily.

Vague conditions (“buyer satisfied with diligence”) give the buyer an unlimited out. Push for specific, objective conditions.

7. Seller transition and consulting

How long do you stay after closing, in what role, for what compensation?

• Transition period: typically 30–180 days, full or part-time.
• Consulting agreement: $0 (included in purchase price) or a separate compensation structure.
• Non-compete: geographic and time scope; affects valuation if too narrow or invalid.

8. Earnout terms (if applicable)

If you’ve agreed to an earnout, the LOI must lock in:

• Metric (revenue, EBITDA, customer retention, specific milestones) — EBITDA earnouts are riskier for sellers because the buyer controls expenses.
• Period (1–3 years; longer is worse for sellers).
• Audit rights and dispute resolution.
• Protection against manipulation — restriction on buyer cost-shifting, separate accounting for the acquired business, acceleration on sale or change of control.

9. Allocation of purchase price (asset sales)

In asset deals, the purchase price gets allocated across categories with different tax treatments. The buyer prefers more allocation to short-life depreciable assets; the seller prefers more to goodwill (taxed at long-term capital gains). Negotiate or specify the allocation methodology now.

10. Confidentiality, expenses, and break-up fees

• Confidentiality is typically binding — protect against buyer leaking your data if the deal dies.
• Expenses are typically each-party-bears-its-own; watch for asymmetric expense provisions.
• Break-up fees are unusual in lower-middle-market deals; if proposed, negotiate symmetry.

Common LOI mistakes sellers make

• Signing too quickly. Two weeks of LOI negotiation is reasonable for any meaningful deal.
• Treating the price as the deal. Structure, working capital, and earnout terms can swing the actual outcome by 20%+.
• Accepting boilerplate exclusivity without milestones. Slow buyers will use the full clock without progressing.
• Letting the buyer’s counsel draft the LOI and accepting their language. Push back early; precedent set in the LOI tends to hold.
• Not running every term by your tax advisor. Asset versus stock, allocation, equity rollover, earnout — each has tax implications that may push you toward a different structure.

What to do before you sign

• Have your attorney review every provision and flag binding versus non-binding language.
• Have your CPA model the after-tax outcome of the proposed structure.
• Have your broker pressure-test the buyer’s financing and any contingencies.
• Walk away mentally. If you couldn’t comfortably accept the deal as written, do not sign.

The LOI is not the end of the negotiation, but it is the moment where most of the deal gets decided. Treat it accordingly.

If you’re earlier in the process and want to understand what your business should command before you ever see an LOI, a confidential valuation is the cleanest place to start.