Letter of Intent (LOI) in a Business Sale: What to Sign

The LOI is the moment your leverage peaks and then starts to shrink. Signing the right one protects your price. Signing the wrong one quietly costs you six or seven figures at close. Here is what to look for.

What an LOI actually is

A Letter of Intent is a short document — usually 3 to 8 pages — that spells out the headline terms of a proposed acquisition before the parties spend real money on legal drafting and due diligence. Most of it is non-binding, meaning either party can walk. But a handful of clauses are binding the moment you sign, and those clauses shape every negotiation that follows in the definitive agreement.

The terms that decide the deal

Term	Why it matters
Purchase price	The headline number. Only meaningful once you know the structure below.
Cash at close	The portion wired to you at signing. Push for as high a percentage as possible.
Seller note	Money the buyer owes you post-close. Interest rate, term, and security matter.
Earnout	Contingent on future performance. Cap the % and control the metrics.
Working capital target	Sets the peg for post-close price adjustments. Get your CPA involved before signing.
Escrow / holdback	Money withheld for reps and warranties claims. 5–15% for 12–24 months is standard.
Exclusivity (no-shop)	Binding. 60–90 days is normal. Longer periods hand leverage to the buyer.
Deal structure	Stock vs asset sale drives your tax bill by six or seven figures. Model both.

The traps that cost sellers real money

A working capital peg set from a snapshot month. If the buyer pegs off your highest-inventory month, you deliver less and lose the difference at close.
Open-ended exclusivity. "Until diligence is complete" gives the buyer forever. Use hard dates.
Earnout metrics the buyer controls. If the buyer decides marketing spend, accounting methods, or headcount, they can shape the number to their favor.
Escrow with no cap on liability. Rep and warranty exposure should be limited to the escrow amount for most breaches.
Missing tax structure. If the LOI is silent on stock vs asset sale, the buyer will push for asset — which usually costs sellers 15–25% more in taxes.
Fee shifting. Some LOIs make the seller pay buyer's diligence costs if the deal breaks. Never accept this without a mutual break fee.

Before you sign

Have your M&A attorney (not your general business attorney) review every binding clause.
Have your CPA model the after-tax proceeds under the proposed structure.
Negotiate the working capital target off a trailing 12-month average, not a snapshot.
Cap escrow, exclusivity, and earnout — every one of them.
Confirm the buyer's financing is committed, not "expected."

Every term here — exclusivity, earnout, working capital target, escrow, stock vs asset sale — is defined in our business sale glossary.

Frequently asked questions

Is a Letter of Intent legally binding?

Most of the LOI is non-binding — the purchase price, structure, and closing conditions are subject to due diligence and the definitive agreement. But specific clauses are almost always binding: exclusivity (no-shop), confidentiality, expense responsibility, and governing law. Read carefully and negotiate the binding sections as if they were a contract, because they are.

How long should exclusivity in an LOI last?

60–90 days is standard for a well-prepared deal. Longer periods hand the buyer leverage — if they slow-play diligence, you cannot talk to backup buyers. Push for 60 days with a single 30-day extension only if diligence is progressing in good faith.

What is a working capital target and why does it matter?

Working capital target (or peg) is the amount of current assets minus current liabilities the buyer expects to receive at closing. If you deliver less than the target, the purchase price is reduced dollar-for-dollar. Sellers regularly lose $100K+ in post-closing adjustments because the LOI set the peg too high. Get your CPA involved before signing.

Should I accept an earnout?

Sometimes. An earnout ties a portion of your price to future performance — it can bridge a valuation gap, but you are still working for the money after you sold the business. Never accept an earnout larger than 15–20% of total consideration, and never one that depends on decisions the buyer controls (headcount, marketing spend, accounting methods).

What is escrow and how much is normal?

Escrow (or holdback) is 5%–15% of purchase price held back for 12–24 months to secure the buyer against breaches of your representations and warranties. Rep and warranty insurance is increasingly used on deals over $10M to reduce or eliminate escrow entirely.

Can I negotiate after signing the LOI?

Yes, but leverage shifts to the buyer once exclusivity starts. Any material term not spelled out in the LOI is genuinely open, but changing terms already agreed — price, structure, escrow — is difficult without a good faith reason. Negotiate hard at the LOI stage; that is when your leverage is highest.

Have an LOI on the table?

We review LOIs for Central Ohio business owners before they sign — so you know exactly what each clause commits you to, and where to push back.

Request an LOI review

Letter of Intent in a Business Sale