- The letter of intent is where your leverage peaks. Before you sign, the buyer is still competing for your business. After you sign an exclusivity clause, it is not, and every open term tends to move in the buyer’s favor.
- “Nonbinding” does not mean nothing binds. Exclusivity, confidentiality, expenses, and governing law usually bind the day you sign, and Delaware courts have awarded damages when a party broke a promise to negotiate in good faith.
- The headline price matters less than how it is paid. Pin down cash at closing, the definition of debt, the working capital target, the escrow, and any earnout, seller note, or rollover in the letter itself, in dollars.
- Keep exclusivity short and conditional. Mintz, a law firm, recommends sellers accept 30 to 45 days with no more than one automatic extension. Also ask for exclusivity to end if the buyer cuts the price.
This guide provides general information rather than legal or tax advice. A transaction attorney should review any letter of intent before you sign it.
What a letter of intent is, and what to negotiate before you sign
What should you do with a letter of intent? Do not sign it yet. Have a transaction attorney mark which sections bind the day you sign, then use the time before exclusivity starts to get cash at closing, the definition of debt, the working capital target, and a short exclusivity period written into the letter, in dollars and days.
A letter of intent (LOI) is a short document, usually a few pages, that records the main terms a buyer proposes for acquiring your business before the lawyers draft the full purchase agreement. Most of it is nonbinding. As Mintz advises sellers, the LOI “generally should be nonbinding,” but “it is common for a few provisions of the LOI to be binding,” usually governing law, venue, confidentiality, and exclusivity.
Before you sign, negotiate twelve things: how the price is paid, what counts as debt, the working capital target, exclusivity, which sections bind, the buyer’s financing, what diligence can change, the escrow and indemnity terms, any earnout, any rollover, the tax structure, and your role after closing. Each is covered below, with a checklist at the end.
If an offer arrived unprompted, start with our guide to evaluating an unsolicited offer. For where the LOI fits in the full sale, see our guide to the lower middle market M&A process.
Why the letter of intent is where your leverage peaks
Before the LOI, a buyer is competing with other buyers, or with your option to walk away. After you sign exclusivity, you generally agree to stop talking to anyone else while the buyer spends money on accountants and lawyers. Every week of exclusivity makes it harder and more costly for you to restart a process, and buyers know it.
Buyers cut the price after the LOI in about one in six smaller deals. Meaden & Moore, a CPA firm, summarized an Alliance of M&A Advisors study of deals closed in 2021: for deals under $20 million, 17% closed below the LOI price, with an average cut of 18%, while 16% closed above it.
Most broken deals break over what diligence turns up. Axial’s Dead Deal Report on 75 broken letters of intent from 2025 found the most common causes were diligence findings outside the quality of earnings review (25.3%), discrepancies in EBITDA found by the quality of earnings review, an accountant’s test of whether your reported profit holds up (21.3%), and renegotiation (14.7%).
A buyer lowering the price after it has studied your records is sometimes called a re-trade. Some re-trades are fair, because diligence found a real problem. Many are avoidable, because the issue was knowable before the LOI. The best defense is to settle as much as possible while other buyers are still at the table, and to prepare your records before you sign. Our due diligence checklist covers what buyers will ask for.
If a letter of intent is on your desk now
- Do not sign or agree to terms by phone. Tell the buyer you are reviewing it with your advisors and will respond in writing.
- Ask for the price in pieces. Cash at closing, escrow, earnout, seller note, and rollover, each in dollars.
- Send it to a transaction attorney before you respond. The first job is to confirm which sections bind when you sign.
- Check the confidentiality section before discussing it with anyone. If it covers the letter’s own terms, you may not be able to share them. You can usually still decide whether to invite competing offers before you accept exclusivity.
- Respond with a written markup. Accept what works and propose specific language for the terms below that do not.
The 12 terms to settle before you sign
| Term | A buyer’s opening draft often says | What sellers commonly push for |
|---|---|---|
| Price and payment | A headline number | Cash at closing, deferred amounts, and escrow each stated in dollars |
| Debt | “Cash-free, debt-free” | A written list of what counts as debt |
| Working capital | “A normalized level” | The method, ideally a dollar target, and a collar |
| Exclusivity | 60 to 90 days, with extensions | 30 to 45 days, one extension, ends on a price cut |
| Binding terms | Broad good-faith language | A short list of binding sections, nothing else |
| Financing | “Subject to financing” | Named sources of funds and proof |
| Diligence | “Satisfactory due diligence” | A timeline and a defined scope |
| Escrow and indemnity | Left for the purchase agreement | Escrow size, liability cap, and claim deadline, or insurance |
| Earnout | EBITDA targets, buyer control | Revenue targets, short period, operating protections |
| Rollover | A percentage | Same class of equity as the buyer, right to sell when the buyer sells |
| Tax structure | Asset purchase | Structure and allocation agreed before signing |
| Your role | “To be discussed” | Term, pay, and noncompete scope in writing |
Illustrative positions, partly drawn from the guidance cited in this guide. Every negotiation differs.
Sample seller-friendly language (illustrative only; your attorney should draft the real clauses)
Exclusivity: “For [45] days after signing, Seller will not solicit or negotiate another sale of the Company. Exclusivity ends early if Buyer proposes a lower purchase price or less favorable terms than this letter, or if Buyer has not delivered a first draft of the purchase agreement within [21] days.”
Binding provisions: “Only the sections titled Confidentiality, Exclusivity, Expenses, and Governing Law are binding. No other part of this letter creates any obligation, including any obligation to negotiate.”
Price: “Purchase price of $[X], consisting of $[A] cash at closing, $[B] indemnity escrow for [N] months, and $[C] earnout, each as described below.”
1. How the price is paid, not just the price
The headline price is the total a buyer offers; what matters is how much of it arrives as cash on closing day. A $20 million LOI can mean $20 million in cash or a much smaller check plus promises. Ask the buyer to break the headline number into cash at closing, escrow, earnout, seller note, and rollover, each in dollars. In the smaller end of the market, most of the price is usually paid in cash: the IBBA and M&A Source Market Pulse survey for Q2 2026 reports that “sellers received 83% to 92% cash at close on average” in deals up to $50 million. An LOI that pays well below that deserves a harder look. Our guide to what you keep after selling walks a $20 million offer down to cash at closing.
2. What counts as debt
Most offers are made on a cash-free, debt-free basis: you keep the company’s cash and pay off its debt from the price. The fight is over the word “debt.” Bank loans are obvious. Buyers may also try to include unpaid taxes, deferred revenue, customer deposits, accrued bonuses, or deferred maintenance, and each item reduces your proceeds dollar for dollar. Ask for the list in the LOI. A buyer that will not name its debt-like items before exclusivity will name them afterward.
3. The working capital target
Working capital is roughly what customers owe you plus inventory, minus the bills you owe. Buyers expect the business to arrive with a normal level of it, called the target or peg. EisnerAmper notes that the peg “is typically calculated by averaging a business’s pro forma adjusted NWC over the most recent twelve-month period,” that working capital “can have a dollar-for-dollar impact to the purchase price,” and that key definitions “can be clearly articulated in the LOI.” Mintz adds that sellers should consider a collar, a band around the target where no adjustment is made. “A normalized level of working capital” with no method is an invitation to argue later. Our working capital peg guide covers the mechanics.
4. How long should exclusivity last?
Exclusivity, also called a no-shop, is the clause that stops you from talking to other buyers for a set period. It is usually binding the day you sign. Mintz writes that sellers should generally accept a period “typically ranging from 30 to 45 days” and, if they agree to automatic extensions, “limit it to one.” The law firm Beresford Booth describes exclusivity as “typically 60 to 90 days, though buyers routinely push for longer,” so expect the buyer to ask for more than Mintz recommends.
Length matters because broken deals tie sellers up for months. In Axial’s Dead Deal Report, letters of intent that later broke had been under exclusivity for an average of 106 days with private equity buyers, 125 days with corporations, and 129 days with independent sponsors, dealmakers who raise money for each deal rather than from a standing fund.
Protections worth asking for:
- A hard end date. No open-ended language such as “for so long as the parties are negotiating in good faith.”
- Milestones. For example, a first draft of the purchase agreement within a set number of days, and a financing commitment letter by a set date, with exclusivity ending if either is missed.
- An exit on a price cut. If the buyer proposes lower economics than the LOI, exclusivity ends.
- One extension at most, and only if the buyer is on schedule.
5. Which parts of the letter are binding?
State plainly which sections bind (typically confidentiality, exclusivity, expenses, and governing law) and that nothing else does. The biggest risk is loose wording, especially a promise to “negotiate in good faith.” Delaware treats that promise as a real obligation. As the Delaware Supreme Court put it in Cox Communications v. T-Mobile (2022), parties to such agreements “must negotiate the open terms in good faith, but they are not required to make a deal.”
Breaking that promise can be expensive. In SIGA Technologies v. PharmAthene, a license term sheet whose footer read “Non Binding Terms” was attached as an exhibit to two signed agreements that required the parties to negotiate in good faith in accordance with its terms. The Court of Chancery found that the parties likely would have reached a deal but for SIGA’s bad faith, and in 2015 the Delaware Supreme Court affirmed an award of $113 million in expectation damages, the profit the deal would have produced.
Smaller disputes end differently. In a May 2026 letter decision, Postbit v. Look Dynamics, involving a term sheet for a merger valued at $38 million to $65 million, the Court of Chancery entered a default judgment on liability after the defendant failed to retain counsel. It awarded about $360,000 in reliance damages, the money the plaintiff had spent while negotiating, and declined expectation damages because the plaintiff offered no meaningful evidence of them, noting its concern about the “inherently speculative task” of measuring them for this kind of breach.
What this means for you: good-faith language can protect you from a buyer who stalls, and it can also bind you. Decide with your attorney which you want before you sign.
6. The buyer’s financing
Financing is where the buyer’s money comes from: its own fund, a bank or SBA loan, or payments from you. An offer is only as good as that money. Ask where the funds come from, whether the buyer’s equity is committed, which lender is involved and how far along it is, and whether the LOI is conditioned on financing. Axial found financing behind 10.7% of the broken letters of intent in its 2025 report.
If the buyer plans to use an SBA 7(a) loan, which is common for smaller deals, the rules shape what it can offer. Under the SBA’s lending rules (SOP 50 10), a standard 7(a) loan is capped at $5 million and “seller earnouts are prohibited.” A seller note can count toward the buyer’s required equity only if it is on full standby, with no payments of principal or interest for the life of the loan, and even then it can supply no more than half of that equity. Under the updated rules taking effect October 1, 2026, a lender financing the purchase of a business priced at $3 million or more, excluding real estate, must obtain a quality of earnings report. The seller generally may not stay on as an owner, officer, or employee, but may work as a consultant for up to 24 months in total.
7. What diligence can change
Due diligence is the buyer’s review of your financial, legal, and operating records after you sign. “Subject to satisfactory due diligence” gives the buyer a reason to reopen anything. You cannot remove diligence, but you can set a timeline, identify the areas it will cover, and make clear the price assumes the financial information you have already provided. Unrealistic price expectations sink deals too: the Axial 2H 2026 outlook found that 57% of surveyed dealmakers named valuation expectations as the biggest reason deals failed to close in the first half of 2026. A sell-side quality of earnings report before the LOI tests your numbers before the buyer does, so both sides start from earnings that will hold up.
8. Escrow, indemnity, and insurance
An indemnity escrow is part of the price held back after closing to pay the buyer if something you represented about the business proves wrong. Get the outline into the LOI: the escrow amount, the cap on your liability, and how long claims can be brought. According to Fasken’s summary of the SRS Acquiom 2026 Deal Terms Study, the median indemnity escrow in 2025 was 10% of deal value in deals without representation and warranty insurance, but only 0.5% in deals that used it, a policy that sends claims to an insurer instead of your escrow. Ask whether the buyer plans to use it and who pays the premium. Our guide to protecting yourself after closing covers caps, baskets (the minimum claim size before the buyer can collect), and survival periods (how long after closing claims can be brought).
9. Earnout terms
An earnout is part of the price paid later, only if the business hits agreed targets after closing. The LOI should name the metric, the period, and who controls the business while it is measured. Mintz recommends that sellers push for “objective, easily measured metrics such as net sales, revenue” and “if possible avoid targets based upon EBITDA,” which the buyer’s own cost decisions can move. Our guide to earnouts, escrows, and holdbacks explains how often earnouts actually pay.
10. Rollover terms
A rollover is part of your proceeds reinvested as equity in the buyer’s company instead of paid to you in cash. Mintz notes it is “very common for financial buyers to require the selling shareholders to roll over a portion (usually between 10 to 40%) of their proceeds.” If you roll, ask for the same class of equity the buyer’s fund holds, tag-along rights so you can sell when it sells, and disclosure of any management fees the fund charges the company. Our guide to strategic vs. private equity buyers covers why the two make different offers.
11. The tax structure
Tax structure is whether the buyer purchases your company’s assets or its stock, and it can change your after-tax proceeds by more than a price negotiation will. Settle the structure, and the principles for dividing the price among assets, before you sign. If you own an S corporation, the buyer may propose one of two techniques that give it the tax benefits of an asset purchase. A Section 338(h)(10) election generally treats a stock sale as a sale of the company’s assets for tax purposes; it is available only when a corporate buyer acquires at least 80% of the stock, and it must be made jointly by the buyer and every S corporation shareholder, including any who do not sell. An F reorganization, The Tax Adviser explains, can give the buyer a stepped-up tax basis, meaning larger future tax deductions, in the portion of the company it buys, even when you keep or roll over part of it, and can let you defer tax on the rolled portion. Either can raise your tax bill. If it does, ask in the LOI for a gross-up, meaning the buyer adds enough to the price to cover the extra tax. Our guide to asset sales vs. stock sales covers the trade-offs.
12. Your role after closing
Your post-closing role is the job, pay, and restrictions you accept after the sale. Put it in writing: title, duties, how long you stay, what you are paid, and the length and geography of any noncompete. The Federal Trade Commission’s 2024 rule banning most noncompetes never took effect: a federal court set it aside, and in September 2025 the FTC dropped its appeals. Even that rule would have exempted noncompetes signed as part of a genuine sale of a business. Whether your noncompete is enforceable is decided mainly under state law, and a noncompete in your post-closing employment agreement may be judged more strictly than the one tied to the sale. Keep the length and geography tied to the business you are selling. A transition you expect to last six months and a buyer expects to last three years is a problem better found now.
Other terms worth a sentence in the letter
- Conditions to closing, including landlord, customer, and license consents that an asset sale may require.
- Expenses. Each side usually pays its own. Break-up fees are uncommon in private deals: the SRS Acquiom 2025 Deal Terms Study found no termination fee in 79% of deals in 2024.
- Contact rules. When, and with your permission only, the buyer may speak with employees, customers, and suppliers.
- Timeline. A target closing date that matches the exclusivity period.
What are the warning signs in a letter of intent?
- A headline price with no breakdown of cash at closing.
- “Normalized working capital” with no method or number.
- Exclusivity longer than 60 days, automatic renewals, or no end date.
- A financing condition from a buyer that cannot show where its money comes from.
- Broad good-faith language covering the whole letter.
- An earnout measured on EBITDA the buyer will control.
- “To be determined” on structure, escrow, or your employment terms.
How long does it take to close after you sign?
Plan for months, not weeks. Many advisors plan on 60 to 90 days from letter of intent to closing, but survey data suggests diligence alone often runs longer. The IBBA and M&A Source Market Pulse survey for Q4 2025 reports that “roughly three to four months are spent in due diligence, after a signed letter of intent or offer,” and its Q1 2025 survey recorded a 5.5-month average diligence period for businesses in the $5 million to $50 million range, the longest in the survey’s roughly 13-year history. That is why exclusivity milestones matter: a 45-day exclusivity period will not cover the whole process, but it should cover the buyer’s first real commitments. Our guide to how long it takes to sell a business covers the full timeline.
Checklist: before you sign a letter of intent
- Cash at closing, escrow, earnout, seller note, and rollover are each stated in dollars.
- The definition of debt is listed, including debt-like items.
- The working capital target has a method, ideally a number, and possibly a collar.
- Exclusivity is 30 to 45 days, with at most one extension and a hard end date.
- Exclusivity ends if the buyer lowers the price or misses a milestone.
- Only named sections are binding.
- The buyer has identified its sources of funds, and any SBA constraints are understood.
- Diligence has a timeline and scope.
- Escrow size, liability cap, claim deadline, and insurance plans are outlined.
- Any earnout uses an objective metric and a short period.
- Any rollover specifies the class of equity and tag-along rights.
- Asset or stock structure, allocation principles, and any tax gross-up are agreed.
- Your role, pay, term, and noncompete are in writing.
- Your transaction attorney and tax advisor have reviewed the letter.
Frequently asked questions
Is a letter of intent legally binding? Mostly not. The price and deal terms are usually nonbinding, but provisions such as exclusivity, confidentiality, expenses, and governing law usually bind the day you sign. Language promising to negotiate in good faith can also create an enforceable obligation.
How long should exclusivity last? Mintz, a law firm advising sellers, recommends 30 to 45 days, with no more than one automatic extension. Buyers often ask for 60 to 90 days. Tie any extension to milestones, and end exclusivity if the buyer lowers the price.
Can a buyer lower the price after I sign a letter of intent? Yes. Because the price is usually nonbinding, a buyer can propose new terms after diligence. Settling key definitions in the letter and preparing your records beforehand reduce the room for it.
What if I already signed a letter of intent? Find the exclusivity end date and any milestones, because those are usually binding. The price and most other terms usually are not, so they can still be negotiated in the purchase agreement. Have your attorney confirm what binds, and have your records ready for diligence.
What is the difference between an indication of interest and a letter of intent? An indication of interest is an early, nonbinding price range used to decide which buyers go further. A letter of intent sets out more detailed terms and usually includes binding exclusivity.
Should I have a lawyer review the letter of intent? Yes. The binding sections take effect when you sign, and the terms you leave open will shape the purchase agreement. A transaction attorney should review it before you sign.
Working with an advisor on the letter of intent
Salt Creek Advisory helps owners compare letters of intent side by side, translate each into cash at closing, and negotiate the terms above while more than one buyer is still interested. Jack and Connor stay involved throughout, alongside your transaction attorney and tax advisor, who review the binding provisions and structure. Owners weighing an offer can schedule a confidential conversation with Salt Creek Advisory or start with a free preliminary valuation.