A Letter of Intent (LOI) outlines the key commercial and legal terms under which a buyer proposes to acquire your business. While often described as “non-binding,” several LOI clauses materially affect valuation, deal structure, and your negotiating leverage. Sellers who understand these clauses before signing an LOI protect value, reduce deal risk, and maintain control throughout the transaction process.
Why This Matters for Business Sellers
For many business owners, receiving an LOI feels like crossing the finish line. In reality, it is the point where risk becomes real.
The LOI sets expectations around price, structure, exclusivity, and timelines—long before definitive agreements are negotiated. Sellers who treat the LOI as a formality often discover too late that they have:
- Locked themselves into unfavourable deal terms
- Given buyers leverage through exclusivity
- Accepted valuation assumptions that reduce final proceeds
- Limited their ability to negotiate later
From an exit planning perspective, the LOI is where deal outcomes are shaped, not finalized. Understanding its clauses early can be the difference between a premium exit and a compromised one.
How Buyers Actually Use the LOI in M&A Deals
Buyers do not view the LOI as a casual document. They use it to:
- Anchor valuation expectations
- Secure exclusivity before incurring diligence costs
- Define economic terms in their favour
- Create psychological momentum toward closing
While sellers may believe terms are still “open for discussion,” buyers often consider the LOI the framework that future negotiations should not materially deviate from.
This mismatch in expectations is one of the most common sources of seller frustration—and deal tension.
Key LOI Clauses Every Seller Must Understand
Purchase Price and Valuation Structure
The headline price is only part of the story.
Sellers must look beyond the top-line number and understand:
- Is the price fixed or subject to adjustments?
- How much is paid at closing versus later?
- Are earn-outs or performance hurdles included?
- Is working capital included or normalized later?
Buyers often propose attractive headline valuations while shifting risk through contingent payments or post-closing adjustments. For business valuation for sellers, clarity here is critical.
Deal Structure: Asset Sale vs. Share Sale
The LOI often specifies the transaction structure, which has major implications for:
- Taxes
- Liability transfer
- Complexity of closing
Sellers should never assume structure is a technical detail. It directly affects net proceeds and post-sale risk. Changing structure later is possible—but difficult once expectations are set.
Earn-Outs and Contingent Consideration
Earn-outs are one of the most misunderstood LOI components.
From a seller’s perspective, key questions include:
- What performance metrics are used?
- Who controls decisions that impact earn-out outcomes?
- Over what time period is performance measured?
Earn-outs can bridge valuation gaps, but they also transfer execution risk back to the seller. Poorly defined earn-outs are a leading cause of post-closing disputes.
Exclusivity (No-Shop Clause)
Exclusivity clauses prevent sellers from engaging with other buyers for a defined period—often 60 to 120 days.
While exclusivity is common, sellers must understand:
- How long exclusivity lasts
- Whether extensions are automatic
- What happens if diligence drags on
Granting exclusivity too early or too broadly removes competitive tension and shifts leverage to the buyer. Many sellers underestimate how difficult it is to re-engage other buyers once exclusivity is granted.
Due Diligence Scope and Timeline
The LOI typically outlines:
- Areas of due diligence
- Expected timelines
- Seller cooperation requirements
An open-ended diligence clause creates risk. Without clear boundaries, buyers may repeatedly revisit issues to renegotiate price or terms.
From an exit planning for business owners standpoint, discipline here protects momentum and valuation.
Management Retention and Transition Expectations
LOIs often include expectations regarding:
- Seller’s post-closing involvement
- Management retention
- Non-compete and non-solicitation terms
Sellers should assess whether these expectations align with their personal goals. Many founders only realize after signing that they have committed to longer-than-expected transition periods.
Confidentiality and Public Disclosure
While confidentiality is assumed, the LOI should clearly address:
- Who can be informed about the transaction
- When employees or customers may be notified
- Restrictions on public disclosure
Poorly drafted confidentiality clauses increase the risk of internal disruption if the deal does not close.
Termination Rights and Break-Up Provisions
Sellers should understand:
- When either party can walk away
- Whether costs are reimbursable
- If penalties apply to termination
An LOI that heavily favours buyer exit rights increases seller exposure without corresponding protections.
Common Mistakes Sellers Make with LOIs
Across transactions, experienced M&A advisors see the same errors repeatedly:
- Treating the LOI as non-binding and low-risk
- Focusing only on headline price
- Accepting exclusivity without safeguards
- Underestimating the difficulty of renegotiating terms later
- Signing without independent advisory review
The most costly mistake is assuming that “we’ll fix it in the definitive agreement.” In practice, most material economics are already set by the LOI.
Why LOI Strategy Determines Exit Outcomes
From an M&A advisory perspective, the LOI is not a preliminary step—it is a strategic inflection point.
Sellers who work with an experienced M&A advisor before signing an LOI consistently achieve:
- Higher valuations, by preserving competitive tension
- Better deal structures, with less contingent risk
- Lower transaction risk, through disciplined diligence and timelines
Advisors help sellers:
- Evaluate economic substance beyond headline terms
- Anticipate buyer negotiation tactics
- Protect leverage during exclusivity
- Align LOI terms with long-term exit goals
For sellers learning how to prepare a business for sale, LOI readiness is as important as financial preparation. The strongest exits are negotiated before exclusivity begins.
Conclusion: The LOI Is Where Sellers Win or Lose Leverage
For business owners planning to sell their business, the Letter of Intent is not a formality—it is the blueprint for the entire transaction.
Understanding LOI clauses early protects valuation, preserves flexibility, and reduces the risk of unpleasant surprises later. The most successful exits are not rushed; they are strategically negotiated.
If you are considering when to sell your business or evaluating an LOI, a confidential discussion with an experienced M&A advisor for business owners can help you assess risk, protect value, and move forward with clarity—on your terms.
FAQs:
Is a Letter of Intent legally binding?
Most LOIs are partially binding. While purchase terms are often non-binding, clauses such as exclusivity, confidentiality, and governing law are typically enforceable.
Can I renegotiate terms after signing an LOI?
Yes, but leverage is reduced. Buyers often resist material changes unless new information emerges during diligence.
Should I accept the highest LOI price?
Not necessarily. Structure, certainty of closing, and post-closing risk matter as much as headline valuation.
How long should exclusivity last?
Exclusivity should be as short as reasonably possible—long enough for diligence, but not open-ended. Extensions should be earned, not automatic.
Do I need an M&A advisor before signing an LOI?
Ideally, yes. Advisors help evaluate risk, preserve leverage, and align the LOI with your exit objectives before constraints are imposed.