Letters of Intent Explained: What to Sign, What to Negotiate, What to Watch For

Letters of Intent: What to Sign, What to Negotiate, What to Watch For

What a Letter of Intent Actually Is

What It Feels Like to Get One

Whether it comes through your broker or arrives directly from a buyer, the moment feels the same. Someone — maybe a strategic acquirer in your industry, maybe a private equity group — has decided your business is worth buying. If you’re working with a broker, they’ve been managing this conversation for weeks, qualifying the buyer, sharing your information under NDA, and building toward this moment. If it’s a direct approach, it usually starts with flattering conversations about your team, your reputation, the growth they see. Either way, it ends the same: a letter of intent lands in your inbox “just to get something on paper.”

It’s exciting. It’s also where most sellers start making decisions they’ll regret.

The rush you feel is real. Someone has looked at everything you’ve built and decided it’s worth buying. There’s a number on the page. You want to say yes before they change their mind.

That instinct - to move fast, to lock it in - is exactly what costs sellers money. The LOI is the moment where you either give away your leverage or create it. Signing the first thing that lands in your inbox, with a long exclusivity period and vague terms, puts the buyer in control for the rest of the deal. Slowing down, understanding what every clause means, and negotiating before you sign keeps that control where it belongs: with you.

The Handshake on Paper

A letter of intent is a written agreement that outlines the proposed terms of a deal. Think of it as a detailed handshake - it says “here’s what we’re both agreeing to pursue” before anyone spends serious money on attorneys and accountants to close the transaction.

The LOI isn’t a purchase agreement. It doesn’t commit you to sell your business. What it does is establish the framework - price, structure, timeline, exclusivity - that will guide the rest of the deal.

Binding vs. Non-Binding Terms

Here’s what trips up most sellers: an LOI contains both binding and non-binding provisions in the same document.

The binding portions are enforceable contracts. If you violate the exclusivity clause, the buyer can sue you. The non-binding portions express intent - they describe what both parties plan to do, but either side can renegotiate during the definitive agreement stage.

This is why the LOI matters so much. The “non-binding” price might technically be renegotiable, but in practice, whatever number appears in the LOI anchors everything that follows. If a buyer puts a price in the LOI, the final number will land within range of that anchor unless due diligence uncovers something unexpected. That price becomes the ceiling, not the floor.

What’s Inside an LOI (Every Key Term Explained)

Purchase Price and Payment Terms

The headline number gets all the attention, but price alone doesn’t tell you what you’re actually walking away with. An offer that splits the purchase price between cash at closing, an earnout, and a seller note is a very different deal than a slightly lower all-cash offer.

Pay attention to how the price breaks down: how much is paid at closing, how much is deferred (seller financing), how much is contingent on future performance (earnouts), and what’s held in escrow. Each component carries different risk. Cash at closing is certain. Everything else depends on something happening after you’ve handed over the keys.

For a deeper dive into what these structures mean for your take-home, see our guide on deal structure.

Deal Structure — Asset vs. Stock

The LOI should specify whether this is an asset sale or a stock sale. This choice has major tax implications for both parties. Buyers generally prefer asset sales (they get a stepped-up tax basis). Sellers often prefer stock sales (simpler, potentially lower tax rate on gains). The structure can mean a six-figure difference in your after-tax proceeds.

If the LOI doesn’t specify, ask. This isn’t something you want to discover during purchase agreement negotiation.

Earnouts at the LOI Stage

Earnouts appear in LOIs when buyer and seller disagree on what the business is worth. The buyer says “I’ll pay you X now, and if the business hits these targets over the next two years, I’ll pay you Y more.” It sounds reasonable. The problem is what happens after closing.

Once you sell, you don’t control the business anymore. The buyer makes the hiring decisions, the spending decisions, the pricing decisions. If your earnout is tied to EBITDA and the new owner loads the business with overhead, your earnout evaporates - and there’s nothing you can do about it.

The LOI stage is your best chance to push back on earnout terms. If a buyer proposes an earnout, ask yourself: will I control the metrics this payout depends on? If the answer is no, that earnout isn’t real money - it’s a discount dressed up as a higher price.

For how to protect yourself if an earnout is on the table - control rights, measurement methodology, dispute resolution - see our deal structure guide.

Exclusivity Period — The No-Shop Clause

The exclusivity clause prevents you from negotiating with other buyers during a specified period. This is one of the binding provisions - once you sign, you’re off the market.

Reasonable exclusivity periods run 60-90 days. That gives the buyer enough time to complete due diligence and negotiate the definitive agreement. Be cautious of anything beyond 90 days. At 120+ days, you’re giving the buyer a free option to tie up your business while they take their time.

Here’s what makes long exclusivity dangerous: deal fatigue. As days and weeks pass, you’ve already told your attorney and CPA a deal is in progress. You’ve paused conversations with other potential buyers. You’ve started mentally spending the proceeds. Maybe rumors are circulating. Every day that passes makes walking away psychologically harder - and the buyer knows it.

This is where re-trading happens — that’s the industry term for when a buyer tries to lower the price or change terms after the LOI is signed. A buyer who’s had you locked up for three months knows you don’t want to start over. So they come back after due diligence and say “we found a few things, we need to adjust the price down 10%.” You’re exhausted, you’ve invested months, and you agree to terms you’d never have accepted on day one.

What to push for in the exclusivity clause:

• A hard end date. Exclusivity expires automatically. No renewal without your written consent.
• Milestone triggers. Tie the period to specific DD milestones - financial DD complete by day 20, legal by day 35, purchase agreement draft by day 45. If the buyer misses milestones, exclusivity expires early.
• Clear start date. Exclusivity begins when the LOI is signed, not when the buyer decides to start due diligence. Without this, a buyer can sit on a signed LOI for weeks before starting the clock.

A well-structured 60-day exclusivity with clear milestones protects you better than a 120-day open-ended one - even if the open-ended offer comes with a slightly higher headline price. The price isn’t real if the buyer re-trades it at day 90.

Due Diligence Scope and Timeline

The LOI should define what the buyer can examine and how long they have to examine it. A vague due diligence clause like “buyer shall have satisfactory completion of due diligence” gives the buyer unlimited scope and effectively an escape hatch at any point.

Better language specifies the categories of documents the buyer can review, a reasonable timeline (60-90 days), and clear conditions under which the buyer can walk away. The more specific the DD scope, the less room for post-LOI re-trading.

The distinction matters because vague DD language is one of the most common tools for post-LOI price reductions. Here’s how it works: a buyer signs an LOI with broad, undefined DD rights. Three weeks in, they’ve seen your financials, met your key employees, and talked to your major customers. Now they come back and say “we found some concerns during diligence” and propose cutting the price. You’re deep in the process, you’ve already exposed sensitive information, and they know walking away is painful for you.

A well-drafted LOI limits this risk. It defines what categories get examined (financial, legal, operational, customer), sets a timeline for each phase, and specifies the conditions that would allow a renegotiation vs. a walkaway. Our due diligence guide walks through what a typical buyer review process looks like so you know what to expect.

Working Capital

Whether working capital matters in your LOI depends on how the deal is structured.

In a straightforward asset sale - which is how most businesses under $5M change hands - the buyer is purchasing specific assets (equipment, customer lists, goodwill) and the seller keeps the cash, collects the receivables, and pays off the payables. There’s nothing to adjust because working capital isn’t changing hands. The sale is structured cash-free, debt-free, and the working capital question never comes up.

Working capital adjustments become relevant in stock sales and in larger asset deals where the buyer is acquiring receivables and inventory along with the operating assets. In those transactions, the buyer needs enough working capital in the business to operate from day one, and the LOI should define how that target is set.

If your deal does include a working capital adjustment, push for specifics in the LOI. The careful version defines a target based on your trailing 12-month average and spells out how the price adjusts if actual working capital at closing differs. The lazy version says “customary working capital” or “to be determined” and kicks the definition downstream - usually to purchase agreement negotiation, when your leverage is lower. A target set above your historical average is functionally a price reduction that doesn’t show up until closing day.

The closing process walks through how working capital true-ups work for deals that include them.

Non-Compete Terms

Almost every LOI includes a non-compete clause restricting what you can do after selling. Typical terms are 3-5 years within your industry and geographic area. These are negotiable, but don’t expect to eliminate them - buyers are paying for a business and they don’t want you starting a competitor across town.

What you can negotiate: the geographic scope, the definition of competitive activity, and whether consulting or advisory work is excluded.

Transition Requirements

The LOI may specify how long you’ll stay after closing to help with the transition. This ranges from 30 days to 2 years depending on the business and how owner-dependent it is. Understand what’s expected: full-time involvement, part-time consulting, or just being available for questions.

Pay attention to the compensation structure during transition. Are you being paid a salary? A consulting fee? Is it built into the purchase price or on top of it? A buyer who expects 12 months of full-time transition support as part of the purchase price is getting a significant amount of free labor. Make sure the LOI is clear on what’s included and what’s extra.

What You Should Negotiate Before Signing

Terms That Get Locked In

While most LOI terms are technically non-binding, some are very difficult to change once they’re on paper. Price, structure, and exclusivity period set the rails for the entire rest of the deal. Whatever price appears in the LOI becomes the anchor. You’re not getting a higher number in the purchase agreement.

The same is true for deal structure. If the LOI says asset sale, you’re not switching to a stock sale later without reopening the entire negotiation. And exclusivity? Once you sign, you’re bound. That one’s literally enforceable.

Terms You Can Still Negotiate Later

Detailed representations and warranties, indemnification caps, escrow release schedules, and specific working capital targets often get refined during definitive agreement drafting. The LOI sets the general framework; the purchase agreement fills in the details.

Don’t let a buyer pressure you into negotiating every line at the LOI stage. There’s a reason the definitive agreement exists - it’s where the detailed legal protections get worked out. What you need in the LOI is the right framework: a fair price, a clean structure, reasonable exclusivity, and working capital defined well enough that it can’t be weaponized later. Everything else is attorney territory.

Your Leverage Is Highest Right Now

This is the point most sellers don’t appreciate until it’s too late. Right now, the buyer wants your business. They’ve invested time and money to get here. They don’t want to start over with a different acquisition target. You have leverage.

Once you sign the LOI, the dynamic shifts. You’re off the market. You’ve committed time and emotional energy. You’ve started telling your attorney and CPA that a deal is in progress. Walking away gets harder every day. The buyer knows this.

This is also why the process of selling matters so much. Sellers who run a structured process before the LOI stage — proper valuation, organized financials, clear timeline — negotiate from knowledge. Sellers who receive an unsolicited LOI without that preparation negotiate from hope.

Negotiate now, not later. Whatever terms are important to you - price, structure, transition requirements, non-compete scope - push for them before you sign.

Multiple LOIs and Creating Competition

Single Buyer vs. Competitive Process

Most sellers who come to us with a single unsolicited LOI are in the weakest negotiating position possible. One buyer. One offer. Take it or leave it. Every term in that LOI reflects what the buyer wants, because there’s no pressure to offer anything better. The exclusivity is long. The price is what the buyer decided. The structure favors the buyer. And if you push back, the buyer says “take it or leave it” - because they know there’s nobody else.

When you have multiple LOIs from qualified buyers arriving in the same window, everything changes. Each buyer knows they’re competing. They sharpen their prices. They tighten their timelines. They clean up their contingencies. Exclusivity periods get shorter because buyers don’t want to lose the deal while they wait around. Earnout-heavy offers become cash-heavy offers because the buyer next to them is offering better certainty.

The difference isn’t subtle. Sellers who negotiate from a single offer are hoping the buyer is being fair. Sellers with competing offers are choosing the best option from a field of buyers who are each trying to win.

This is one of the primary reasons sellers work with brokers - a well-run process generates multiple interested buyers whose offers arrive in the same window, creating exactly this dynamic.

How Arx Structures Competitive Bid Processes

At Arx, we use our buyer outreach process to create competition by design, not by accident. We systematically contact 250+ targeted buyers, manage interest in parallel, and coordinate timing so that LOIs come in during the same window. The result is sellers choosing between offers rather than hoping one materializes.

Red Flags in an LOI

Not every LOI is worth signing. Here’s what should make you pause - or walk away:

• Exclusivity longer than 90 days with no milestones. A motivated, well-funded buyer can complete due diligence in 60-90 days. If they want 120+ days with no specific deadlines along the way, they’re either not serious or they want the option to re-trade after you’re too exhausted to fight back.

• Vague due diligence scope. “Buyer’s satisfactory completion of due diligence” without further definition is a blank check. It lets the buyer walk away for any reason and call it a DD issue. Push for specific categories and standards.

• Vague working capital language in a deal that includes it. If your deal involves a working capital adjustment (stock sales, larger asset sales with receivables/inventory), watch for terms like “customary” or “to be determined.” That language gives the buyer room to set the target later when your leverage is lower.

• No discussion of how deal structure affects your tax outcome. Asset vs. stock isn’t a mystery - your broker typically presents the deal one way based on what makes sense. But if nobody has explained how the proposed structure affects your after-tax proceeds, that’s a gap. The structure can mean a six-figure difference on your tax bill. Make sure someone on your team has modeled the tax implications before you sign.

• Open-ended financing contingency. If the buyer hasn’t secured financing or hasn’t provided evidence of pre-approval, the deal depends on whether they can get a loan. That’s not an offer - it’s a wish. Push for proof of financing capacity or a hard deadline for the financing contingency.

• Escrow or holdback that exceeds 15-20% of the purchase price. Escrow is normal - it protects the buyer against post-closing claims. But when the holdback is a quarter of the price or more without strong rationale, the buyer is effectively paying you less at closing and hoping you won’t fight for the rest.

• Contingencies that give the buyer easy outs. Landlord consent contingencies when the lease hasn’t been reviewed. Subjective conditions like “buyer’s satisfactory review of business operations.” Some contingencies are legitimate. Others are exit doors disguised as standard terms. If you’re not sure which is which, that’s what your broker and attorney are for.

The Emotional Reality

It’s Going to Feel Real (Because It Is)

The LOI is the moment where selling your business stops being theoretical and becomes concrete. Someone is putting a number on your life’s work. You’re going to feel excited, nervous, relieved, and terrified - sometimes all in the same afternoon.

That’s normal. Every seller goes through it.

The danger isn’t the emotion itself - it’s letting it drive your decisions. Excitement makes you sign too fast. Fear makes you accept bad terms because you’re afraid the buyer will walk. Relief that someone finally made an offer makes you stop questioning whether it’s the right offer.

Have your attorney review the LOI. Have your broker explain the terms. Then make the decision with a clear head.

When to Walk Away

The LOI is not a commitment to sell. If the terms don’t work, if the buyer isn’t the right fit, if something in your gut says this isn’t right - you can walk away. You should walk away from a bad deal rather than convince yourself it will get better during closing.

Signs it’s time to walk: the price doesn’t reflect your business’s value, the structure puts too much at risk (heavy earnouts, excessive seller financing), the buyer’s behavior during LOI negotiation suggests they’ll be difficult through closing, or the exclusivity terms are one-sided.

Pay attention to how the buyer negotiates at this stage. If they’re aggressive, inflexible, or disrespectful of your time during the LOI process, that behavior will intensify during due diligence and closing. The LOI negotiation is the buyer on their best behavior. If their best behavior is already difficult, the next 60-90 days will be worse.

A deal that doesn’t happen is always better than a deal that goes badly.

What Happens After You Sign

Once the LOI is signed, the clock starts. The buyer’s DD team begins their review, attorneys start drafting the purchase agreement, and you enter the most intense phase of the deal.

Your leverage doesn’t disappear overnight, but it erodes steadily. In the early weeks, the buyer hasn’t invested much beyond their LOI - walking away is still an option for both sides. But once you grant access to customers, introduce the buyer to key employees, or start the landlord consent process, the dynamic shifts. The buyer now has your relationships and your confidential information. Re-starting with a different buyer means explaining those introductions, which is hard to unwind.

This is why the LOI terms matter so much. By the time you’re deep in due diligence, the terms you signed are the terms you’re living with.

Due diligence is next, and it’s the subject that causes the most anxiety for sellers. Understanding what’s coming helps you stay ahead of it.

The path from LOI to closing typically takes 60-90 days. The closing process page walks through everything that happens between the LOI and wire transfer day.

If you’re earlier in the process and haven’t started exploring what selling looks like, let's talk - no fee, no obligation.

Have questions first? Contact us - we're happy to help.