Before You Sign the LOI: The Deal Terms Business Owners Overlook

The letter of intent is often treated as a formality — something to get through on the way to the “real” deal. It’s short, collaborative, and largely non-binding. 

Easy to sign, easy to underestimate, and ideal for the buyer/investor.

While it may seem inconsequential relative to final closing docs, the LOI does more than outline a transaction. It sets expectations, leverage, and risk. It’s where buyers form assumptions, where sellers reveal flexibility, and where the direction of the deal begins to harden. 

For business owners (in the lower middle market segment) selling for the first time, this is also where blind spots tend to appear. The LOI is an early stage in the process, but many of the most consequential decisions are already taking form. One should spend the time to identify and prioritize their goals in advance, and with proper counsel, articulate a long and custom LOI.

Let’s break down the LOI provisions that many overlook, so you can approach your exit with confidence and pride.

What a Letter of Intent Is (and Isn’t)

A letter of intent is a legal document meant to align buyer and seller on the major financial and structural terms of a transaction, before significant time and money are spent. It provides a framework for due diligence and gives both sides confidence that it’s worth investing time, money, and effort into the deal.

An LOI isn’t designed to capture every legal nuance, but it does establish the blueprint for the definitive agreement that follows.

While terms can still change after an LOI is signed, renegotiating core economics (as well as other key priorities for the seller) is far more difficult once the due diligence process is underway. 

“Non-Binding” Doesn’t Mean Inconsequential

Most LOIs are described as non-binding, but that’s only partially true.

Certain provisions are typically legally binding,¹ including:

• Exclusivity or “no-shop” clauses
• Confidentiality obligations
• Governing law and dispute resolution

Even the non-binding terms carry weight. These often include proposed purchase price, payment structure, rollover equity, earnouts, working capital targets, and post-close employment expectations. While technically subject to change, these terms establish expectations, signal risk tolerance, and create reference points that advisors and attorneys will return to later.

Proposed Terms vs. Negotiated Reality

Let’s consider how an LOI plays out in real life.

A founder agrees to rollover equity at the LOI stage, viewing it as a chance to participate in future upside. Later, during diligence, they learn the governance terms attached to that equity limit control, liquidity, and decision-making power far more than expected.

Technically, nothing has been “finalized” yet. But changing those terms now requires reopening issues the buyer believes were already settled. 

The same dynamic applies to earnouts, working capital adjustments, post-close employment expectations, and non-compete language. 

This is why we often say that leverage shifts earlier than sellers expect. By the time diligence begins, the tone has been set, momentum has built, and walking away becomes emotionally and practically harder.

The Terms That Influence the Entire Deal

The LOI introduces key terms and conditions that will dictate outcomes long after the deal is done, sometimes in ways sellers don’t anticipate until it’s too late. Here are a few provisions that deserve your attention.

Purchase Price vs. Payment Terms

When business owners receive an LOI, their eyes almost always go to the headline purchase price.

But how — and when — that price is paid (outlined in the payment terms) can be just as significant as the number itself.

Payment terms typically include some mix of upfront cash, deferred payments, earnouts, and rollover equity. Each offers different levels of certainty and risk. A $50 million deal with elaborate contingencies can feel very different from a $40 million deal with clean liquidity.

In our ongoing founder scenario, let’s say the LOI proposes a $50 million valuation: 60% paid at close, 20% tied to a three-year earnout based on EBITDA growth targets, and 20% rolled into equity in the acquiring entity. 

On paper, the upside looks attractive. In practice, the founder’s future income and net worth are now tied to performance metrics, capital decisions, and governance structures they no longer fully control.

Understanding these mechanics early helps sellers evaluate not just what the deal is worth on paper, but what it means for risk, flexibility, and life after the sale.

Deal Structure: Stock Sale vs. Asset Sale

Deal structure determines what is actually being sold and how risk and taxes are allocated.

In a stock sale, the buyer purchases the seller’s shares and assumes ownership of the entire entity, including assets and liabilities. Sellers normally prefer stock sales because they can result in more favorable capital gains tax treatment and a cleaner exit.

In an asset sale, the buyer purchases selected assets and may leave behind certain liabilities. Buyers usually favor this structure because it limits exposure to historical risks and allows them to reset depreciation schedules. For sellers, however, asset sales can trigger higher ordinary income taxes and leave residual liabilities behind.

Structure directly affects after-tax proceeds, liability exposure, and post-close risk, so it’s rarely a neutral decision. Terms proposed in the LOI can indicate which side has leverage (and how much flexibility remains).

Working Capital and Adjustments

Working capital represents the funds a business needs to operate day to day — generally current assets (e.g., accounts receivable, inventory) minus current liabilities (e.g., payables, accrued expenses).

In an LOI, the parties usually agree on a working capital target, or “peg,” meant to ensure the buyer receives a business with sufficient operating liquidity at closing. After the deal closes, actual working capital is calculated. If it’s above the target, the seller may receive more money; if it’s below, the seller may owe money back.

This may seem simple, but unclear definitions and assumptions are one of the most common sources of last-minute friction at closing — and once established in the LOI, sellers may have little leverage to revisit them. One of the best ways to prepare for this, with proper expectations and negotiating leverage, is by investing in a sell-side Quality of Earnings report in advance. 

Exclusivity, No-Shop, and the Power Shift

An exclusivity (or no-shop) provision prevents a seller from soliciting or engaging with other potential buyers for a defined period. In M&A transactions, this gives the buyer time to conduct due diligence, negotiate terms, and secure financing without competitive pressure.

Exclusivity periods commonly range from 30 to 90 days, though some extend longer. During this window, sellers effectively place their business off the market.

Exclusivity isn’t inherently problematic, but agreeing to it too early or for too long can shift negotiating power in the buyer’s favor. 

Without competing offers, your leverage as a seller can decline, especially if any concerns surface during due diligence. Already invested in the process, you may feel pressure to accept changes instead of starting over. 

If a deal ultimately falls apart, the pause can also create uncertainty or fatigue that complicates future conversations with buyers. Thoughtfully structured exclusivity provisions (reasonable timelines, clear milestones, and defined extension terms) help protect sellers while still allowing buyers to move forward productively.

Legal Language Can Lead to Regret Later

The legal provisions outlined below often receive less attention at the LOI stage — but they can have lasting financial consequences.

Representations, Warranties, and Indemnification

Representations and warranties are statements sellers make about the condition of the business: its financials, compliance, contracts, and operations. Indemnification determines how sellers are held responsible if those statements prove inaccurate after closing.

These provisions define what sellers are standing behind, how much they may owe, and for how long. Indemnification caps limit total exposure. Baskets set thresholds that determine when claims can be made. Survival periods — often 12 to 24 months, sometimes longer for tax or compliance matters — define how long obligations last.

At the LOI stage, you may feel compelled to waive these provisions through as “market standard.” But they determine how risk is allocated long after ownership changes. 

Governing Law, Covenants, and Ongoing Obligations

Governing law determines how disputes are interpreted and resolved. Covenants such as confidentiality, exclusivity, non-solicitation, and expense allocation are often binding even when most LOI terms are not.

Ongoing obligations may define the seller’s post-close role, non-compete restrictions, or which provisions survive if the deal falls apart. These fine-print details are essential, as they’ll shape life after the transaction and can meaningfully affect flexibility and future opportunities.

Why Advisors Are Crucial During the LOI Stage

A coordinated advisory team brings a perspective sellers can’t reasonably have on their own. They’ll help ensure nothing critical is missed early, when leverage is likely highest. That team typically includes:

• M&A advisors or investment bankers: Position the deal, manage buyer dynamics, and protect negotiating leverage
• Legal (specialist in transactions) counsel: Identify binding provisions, risk exposure, and structural issues
• CPAs and tax advisors: Model after-tax outcomes and flag unintended consequences
• Estate and wealth planners: Align the transaction with personal and family goals

And a financial advisor to lead the team and pre-negotiation process. At Simon Quick, we help owners navigate this potentially once-in-a-lifetime transition with clarity and peace of mind.

A Better Way to Think About the LOI

The LOI is a turning point. If it’s rushed or underestimated, sellers can find themselves in a reactionary stance. No matter your feelings or perception about trying to mitigate legal costs, a well-qualified M&A specialist attorney should be engaged well in advance of an LOI signing. 

Business owners who ask the right questions and assemble the right team put themselves in a far stronger position to achieve the optimal outcome. The earlier the focus, the fewer the surprises – the improved probability of closing and the peace of mind long after the close.

Ready to start planning your exit? One conversation today can change your life.

Sources:

1. Koley Jessen, Letters of Intent: The Roadmap of the Deal

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