The Letter of Intent: nine provisions to fight for before you sign.
The LOI is mostly non-binding. Except for the parts that aren't — and the parts that anchor everything that follows.
By the time you're staring at a Letter of Intent, the leverage cliff is about thirty days away. Most LOI provisions are formally non-binding, but they anchor every subsequent negotiation — and a few are binding the moment you sign. This is the working list of what to fight for before the term sheet locks in. Catch the bad terms here. Unwinding them later is much harder.
Not sure where your business would break in diligence? Start with the Self-Assessment.
Why the LOI matters more than most sellers realize.
The LOI is presented as a non-binding outline of the deal — a working document that lets the parties move forward into diligence. Most of it is technically non-binding. But that framing obscures two things: certain provisions are binding from the moment of signature, and the rest establish anchor points that everything in diligence and the purchase agreement gets built against. Every provision that defaults at the LOI becomes the buyer's starting position in the PSA negotiation.
The binding provisions matter immediately. Exclusivity — almost always binding — removes the seller's ability to negotiate with other buyers for the duration of the period. Expense responsibility — usually binding — determines who pays for the costs of a failed deal. Confidentiality — always binding — defines what each side can say about the conversation. The seller who signs an LOI is, at minimum, signing a binding non-shop with binding cost responsibility and binding confidentiality. Those three commitments alone are worth real, careful negotiation.
The non-binding provisions matter almost as much. The headline price. The proposed deal structure. The diligence scope. The escrow framework. The earn-out terms. The rollover assumptions. Every one of these will appear in the PSA, and every one will be negotiated from the LOI position as the starting point. Where the LOI defaults to buyer-favored mechanics, the PSA will too. Where the LOI specifies seller protections, the PSA inherits them. The myth that “it's non-binding so we can fix it later” is the most expensive sentence in middle-market M&A.
The leverage to negotiate any of this is highest before signature and decays rapidly after. Once exclusivity starts, the seller is locked in. Once diligence begins, the buyer is finding reasons to push terms further in their favor. Once you're sixty days into the process and have spent meaningful advisor fees, the cost of walking away from a re-negotiated LOI is the same dollar amount as the cost of accepting it. That asymmetry is the trap. The remedy is treating the LOI like the priced contract it actually is.
What each provision typically says — and what to push for instead.
Each of the nine provisions below has a buyer-favored default that shows up in most LOIs drafted by the buy-side. Each one is negotiable. Each one is consequential.
Exclusivity (the no-shop period)
Buyer-favored default. 30 to 90 days, automatically extending under common conditions, no termination fee.
What to fight for. A defined window with a hard end date and clear extension conditions. Acceleration triggers in your favor — if the buyer misses diligence milestones, exclusivity collapses. A walk-away right if the buyer materially changes price or structure during the period. Exclusivity is the most consequential binding provision in an LOI: it removes your leverage to take the deal to another buyer. Treat it like the priced term it is.
Working-capital peg language
Buyer-favored default. Trailing-twelve-month average; buyer-favored inclusions and exclusions; buyer keeps any excess at close.
What to fight for. The averaging period that fairly represents the business (seasonal businesses may need different mechanics). The specific accounts in and out of the calculation — deferred revenue, accrued bonuses, customer deposits, inventory reserves. Symmetric upside treatment if you deliver above peg. The peg is set in the LOI through these definitions even if the dollar amount comes later. Don't let it default.
Expense reimbursement
Buyer-favored default. Each side pays its own costs in all scenarios.
What to fight for. A break-fee paid by the buyer if they walk for reasons other than your material breach. Reimbursement for your costs if the buyer's diligence team causes material delays beyond defined timelines. This protects you when the buyer is the source of delay, not you. Without it, exclusivity becomes a trap — they can run out the clock and walk away while you watch your fees compound.
Financing contingency
Buyer-favored default. Buyer's obligation conditioned on obtaining acceptable financing.
What to fight for. Either no financing contingency (you wanted an equity buyer; verify they can fund) or a contingency with hard outside dates, defined “acceptable” financing terms, and a meaningful break-fee if financing fails. Open-ended financing contingencies are the cleanest way for a buyer to walk away without consequence. Cap the optionality.
Diligence scope and timeline
Buyer-favored default. Buyer-defined scope, expandable, with timelines tied to buyer satisfaction.
What to fight for. Defined diligence categories with explicit timelines per phase. A “substantial completion” standard with named exit criteria — not open-ended buyer judgment. A clear path to close once defined diligence categories are complete. Without this, diligence becomes a perpetual exercise in finding new things to ask about, extending exclusivity, and softening your position by attrition.
Escrow and indemnification framework
Buyer-favored default. Escrow of 10–15% for 18–24 months. General indemnification cap at full purchase price. Special indemnities uncapped.
What to fight for. Escrow size and survival period locked in the LOI before diligence finds things to expand them. A general indemnity cap meaningfully below purchase price. A clear basket and per-claim threshold so small matters don't consume the escrow. Limited categories of “special” indemnities. R&W insurance to displace as much of this framework as possible. Once locked in the LOI, every diligence finding tries to push it higher.
Earn-out framework
Buyer-favored default. Multi-year earn-out tied to vague performance metrics under buyer control.
What to fight for. Earn-out only where strictly necessary. Specific, measurable performance targets — EBITDA defined in writing, not aspirationally. The seller's ability to operate the business during the earn-out period without buyer interference that depresses performance. A meaningful share of consideration in cash at close. Earn-outs commonly pay out at a fraction of target; the LOI is where this can be structurally limited, not after.
Equity rollover assumptions
Buyer-favored default. Rollover percentage left vague; rollover into common or junior equity with no minority protections.
What to fight for. The rollover percentage set with a defined range, not an open question. The class of equity you're rolling into — preferred or common, with what rights. Tag-along rights so the buyer can't sell out from under you. Information rights post-close. Drag-along thresholds. If you're rolling equity, you're becoming a minority owner in a buyer-controlled entity — every protection comes from what's in the LOI.
Employee and transition obligations
Buyer-favored default. Multi-year employment commitment at the buyer's discretion, broad non-compete, undefined transition role.
What to fight for. The length of the post-close employment or consulting commitment. The defined role, scope, and authority during the transition. Compensation terms — base, bonus, equity continuation. The non-compete scope (geography, sectors, duration). Whether key employees have to sign new agreements pre-close, and what those agreements look like. Founder transition agreements end up being de facto re-employment contracts; the LOI is where the terms get framed.
The exclusivity question, in particular.
Of every provision in an LOI, exclusivity is the one most worth understanding before you sign. It is binding. It is the largest single transfer of leverage in the entire process. And it is the provision sellers most commonly accept without negotiation.
What exclusivity does mechanically: it prohibits the seller from soliciting, entertaining, or negotiating any alternative transaction during the exclusivity period. The seller is contractually committed to dealing only with this buyer until the period ends or the deal closes. The buyer, meanwhile, has not committed to closing — they have committed to attempt diligence, with broad latitude to walk away.
What it costs: every alternative buyer is locked out. Every competing offer that might have surfaced during the exclusivity period — including offers that would have improved your terms — never materializes. If the buyer renegotiates after diligence, you cannot credibly threaten to walk to another buyer because there is no other buyer; you signed away the optionality. Your leverage drops to whatever the buyer is willing to extend.
What it requires in return: a real definition of what the period buys. Hard outside dates. Acceleration triggers if the buyer misses diligence milestones. A walk-away right if the buyer materially changes price or structure during the period — recognizing that re-trading mid-exclusivity is itself a form of bad-faith negotiation. A short period, ideally — thirty to forty-five days is enough for a reasonably-prepared buyer to do reasonable diligence on a reasonably-prepared seller. Anything longer is paying for the buyer's timeline at your expense.
The default LOI exclusivity provision protects the buyer's ability to negotiate at length without competition. The negotiated version protects the seller's ability to maintain leverage if the buyer doesn't perform. The difference is sometimes the difference between the headline price and a renegotiated price six weeks later.
What to have in place before you sit down to negotiate the LOI.
Negotiating an LOI cold is much harder than negotiating with the preparation already done. The work below shifts the conversation from defensive to informed.
Your own working-capital peg analysis. Eighteen months of monthly NWC, computed consistently. Know what your peg looks like — and what definitions would move it. Walk into the LOI conversation with a position, not a question.
Your own QoE-style review of adjusted EBITDA. The add-backs you intend to claim, individually documented, tested against the four standard QoE filters. Conservative presentations hold. Aggressive ones lose ground in diligence, then push back into the LOI's headline price.
A clean diligence response capacity. Customer-level revenue files exportable in a day. Three-to-five years of monthly financials in consistent format. Contract stack inventoried. Operating evidence organized. Sellers who can produce diligence inputs quickly preserve the LOI's timeline; sellers who can't hand the buyer reason to extend.
An honest read on your own gating axes. Financial consistency. Data integrity. The two axes that gate everything else. If either one is shaky in your own view, the LOI will reflect that — and diligence will confirm it. Surface the gaps proactively in the LOI conversation rather than letting the buyer's QoE team discover them later as findings.
A real alternative. The strongest LOI negotiations happen with a credible alternative in the room — another buyer, a refinancing option, a continued operating plan. Exclusivity is much easier to negotiate hard when the seller has the credible option of walking. The Self-Assessment is one source of that alternative posture: a seller who knows their real position negotiates from clarity rather than anxiety.
The non-negotiables — and the legitimate buyer asks.
Not every buyer-favored default is unreasonable. A buyer needs some exclusivity to justify the diligence spend. A buyer needs some confidentiality. A buyer needs some protection if the seller backs out. The negotiation is not whether to grant these — it's where to draw the lines and what to get in return.
The framework for the conversation: every binding provision the seller grants should be matched by a binding obligation the buyer accepts. Exclusivity in exchange for defined diligence timelines. Expense responsibility in exchange for break-fees if the buyer walks. Confidentiality in exchange for return-of-information at termination. The asymmetric LOI — where the seller is bound to many things and the buyer is bound to almost none — is the seller's problem to solve at this stage. After signature, it's too late.
The most important sentence in the LOI negotiation is the one the seller doesn't say: we'll fix this in the PSA. Almost nothing gets fixed in the PSA. The PSA inherits the LOI's anchors and the buyer's leverage compounds with every diligence week. Provisions worth negotiating get negotiated now, while they're still cheap to move.
What sellers most often ask before they go to market.
- What is a letter of intent in M&A?
- A letter of intent is a partially-binding document that outlines the proposed transaction — price, structure, key deal terms — and establishes the framework for diligence. It typically binds the parties on exclusivity, expense responsibility, and confidentiality, while leaving the bulk of the deal terms non-binding pending the purchase agreement.
- Is a letter of intent legally binding?
- Parts of it are. Exclusivity, expense responsibility, and confidentiality are commonly binding from signature. The rest — the headline price, deal structure, escrow framework, earn-out terms, rollover assumptions — is technically non-binding, but becomes the buyer's starting position in the purchase agreement negotiation. Where the LOI defaults to buyer-favored mechanics, the purchase agreement commonly inherits them.
- What should a seller negotiate in an LOI?
- Nine provisions matter most: exclusivity scope and duration; working-capital peg language; expense reimbursement; financing contingency; diligence scope and timeline; escrow and indemnification framework; earn-out structure; equity rollover terms; and employee and transition obligations. Each provision has a buyer-favored default, each one is negotiable, and each one anchors what appears in the purchase agreement.
- How long is an exclusivity period in a typical LOI?
- Thirty to ninety days is common, often with automatic extensions under buyer-favored conditions. A reasonable target for a well-prepared seller is thirty to forty-five days, with hard outside dates, defined extension conditions, and walk-away rights if the buyer materially changes price or structure during the period.
- Can you back out of a letter of intent?
- A seller can usually back out of the non-binding terms — the headline price, the structure, the diligence framework — though doing so during exclusivity may breach the binding provisions. The binding provisions (exclusivity, expense responsibility, confidentiality) continue to apply even if the non-binding deal terms unwind. Walking away after signature without breach is possible but is rarely costless.
Self-Assessment tells you what might break. Gap Review proves whether the documents support the same story.
Know your position before you sign the LOI.
The Self-Assessment grades your business against the same ten-axis instrument the buyer's diligence team will apply. The seller who walks into the LOI conversation with a clear read on their own gating axes negotiates from informed ground — not from the buyer's framing.