Letter of Intent in M&A: What It Means and What to Watch For

This guide walks through every section of a typical LOI, explains which terms are binding and which are not, and covers the most common mistakes sellers make before signing.

TL;DR:

• A letter of intent in M&A sets the framework for the entire deal. Every term in the LOI influences what happens during due diligence and at closing.
• Most LOI terms are non-binding, but exclusivity and confidentiality clauses are almost always binding.
• The biggest risks for sellers are long exclusivity periods, vague working capital language, and underestimating retrading risk.
• Your negotiating position is strongest before you sign the LOI. After signing, that position weakens.

Why the Letter of Intent in M&A Sets the Tone for Your Deal

The LOI is more than a formality. It establishes the economic and structural framework that carries through due diligence, definitive agreements, and closing. Buyers know this. Many first-time sellers do not.

Once you sign an LOI, you are typically locked into an exclusivity period. During that time, you cannot entertain other offers. If the buyer later adjusts terms during due diligence (a practice called retrading), your options narrow to accepting, renegotiating, or walking away and restarting the process.

According to the American Bar Association's 2023 Private Target Deal Points Study, the vast majority of surveyed transactions included some form of exclusivity provision. The LOI is where that exclusivity begins, which is why getting the terms right at this stage matters as much as the final purchase agreement.

When deal patterns are analyzed across hundreds of SMB transactions, a consistent pattern emerges: sellers who negotiate LOI terms aggressively receive final purchase prices closer to the original offer. Sellers who accept the first draft without changes are more likely to face retrading during due diligence.

Step 1: Understand What an LOI Is and What It Covers

A letter of intent (also called a term sheet or indication of interest, depending on the deal stage) is a written proposal from a buyer to a seller. It covers the key economic terms, structural terms, and procedural terms of a proposed acquisition.

Most LOIs run 3 to 10 pages. They confirm that the buyer and seller agree on major deal points before either side invests significant time and legal fees in drafting a definitive purchase agreement.

A typical LOI includes these sections:

• Purchase price and how it is calculated
• Deal structure (asset sale vs. stock sale)
• Working capital requirements
• Earnout or contingent payment provisions
• Exclusivity (no-shop) period
• Due diligence timeline and scope
• Representations and warranties overview
• Conditions to closing
• Confidentiality obligations

Step 2: Break Down Each Section of the Letter of Intent

Each section of the LOI carries specific financial and legal implications. Here is what to look for in each one.

Purchase Price

The purchase price is the headline number, but the details behind it matter more than the total. Look at whether the price is expressed as a fixed dollar amount, a multiple of EBITDA, or a formula tied to financial metrics at closing.

A price stated as "5.0x trailing twelve months adjusted EBITDA" will shift if EBITDA changes between the LOI date and closing. A fixed price of "$10 million" will not. Both approaches have tradeoffs.

Sellers with a data-driven valuation in hand before the LOI arrives are in a fundamentally stronger position. When your asking price is backed by hundreds of comparable transactions and verified financials, a buyer's offer either aligns with the data or it does not.

Deal Structure

The two primary structures are asset purchases and stock purchases. In an asset purchase, the buyer acquires specific assets and assumes specific liabilities. In a stock purchase, the buyer acquires the entire legal entity, including all liabilities.

Asset sales are more common in SMB transactions. They tend to be more favorable for buyers from a tax perspective. Stock sales tend to be more favorable for sellers.

Working Capital

Working capital provisions define how much net current assets must remain in the business at closing. This is one of the most misunderstood sections of any LOI.

The buyer will propose a working capital "peg" or "target." If actual working capital at closing falls below this number, the purchase price is reduced dollar for dollar.

A typical working capital peg is based on a trailing 12-month average. Pay close attention to what is included and excluded in the calculation. Definitions of "current assets" and "current liabilities" vary by deal.

Transaction data shows that working capital adjustments are among the most frequent sources of post-closing disputes in SMB deals.

Earnout Provisions

An earnout ties a portion of the purchase price to future business performance after closing. For example, a buyer might offer $8 million at closing plus $2 million if revenue exceeds $5 million in the 12 months after the deal closes.

Earnouts create risk for sellers. You no longer control the business after closing, yet your payout depends on how the buyer operates it.

Exclusivity Period

The exclusivity (or "no-shop") clause prevents you from soliciting or entertaining offers from other buyers for a defined period. This is almost always a binding provision.

Standard exclusivity periods range from 45 to 90 days. Some buyers push for 120 days or more. Every additional day of exclusivity is a day you cannot create competitive tension.

Due Diligence Timeline

The LOI should specify the timeline and general scope of the buyer's due diligence investigation. A typical due diligence period for SMB transactions runs 60 to 90 days.

Representations and Warranties

Representations and warranties are statements of fact that each party makes about themselves and the business. In the LOI, this section is usually high-level. The detailed reps and warranties appear in the definitive purchase agreement.

At the LOI stage, watch for any unusual or broadly worded representations the buyer is requesting.

Step 3: Know Which LOI Terms Are Binding vs Non-Binding

Most LOI terms are non-binding. Understanding this distinction determines what you are actually committing to when you sign.

Step 4: Negotiate the Letter of Intent Before You Sign

Your negotiating position is at its highest before you sign the LOI. After signing, the buyer has exclusivity and your options narrow.

1. Shorten the exclusivity period. Push for 45 to 60 days.
2. Define working capital clearly. Agree on what accounts are included, what the measurement period is, and how disputes over the final calculation will be resolved.
3. Cap and structure the earnout. If an earnout is part of the deal, negotiate for measurable targets, transparent reporting obligations, and protections against operational changes by the buyer.
4. Set a due diligence scope. A vague due diligence clause gives the buyer unlimited room to request information and extend timelines.
5. Review every binding provision with your attorney. The cost of legal review at this stage is typically $2,000 to $5,000.

The difference between negotiating from instinct and negotiating from data is significant.

Common Mistakes Sellers Make with the Letter of Intent in M&A

1. Signing a long exclusivity period without pushback. A 90 to 120-day exclusivity window removes competitive pressure.
2. Ignoring the working capital language. Working capital adjustments are one of the most common sources of post-closing disputes. Sellers who skip this section frequently see their effective purchase price reduced by $100,000 to $500,000 at closing.
3. Underestimating retrading risk. Retrading occurs when a buyer lowers the purchase price or changes key terms after due diligence begins. It is legal. It is common.
4. Treating the LOI as the final deal. The LOI is an agreement to negotiate. Every non-binding term is subject to change.
5. Not having an advisor review the LOI before signing. Some sellers try to handle the LOI on their own and bring in an advisor later. By that point, key economic and structural terms are already set.