What to Negotiate Before Signing a Letter of Intent to Buy or Sell a Business

By Michael P. Barry, LMB Partners

By the time a buyer and seller sign a letter of intent, they may have agreed on a price but still have different ideas about what that price buys, how much cash changes hands, and what must happen before closing.

A well-prepared LOI brings those differences into the open before diligence costs mount or the seller stops talking to other buyers. Focus on terms that could change whether you want the deal.

Define the price and the actual proceeds

Clarify whether the stated price values the business before debt and cash adjustments or represents the amount payable for the owners’ equity. Identify what is paid at closing, deferred, contingent, or held in escrow.

If the proposal uses “cash-free, debt-free” pricing, define cash, debt, and debt-like obligations. Address transaction expenses and the working capital the buyer expects to receive. Agree on a target, the accounting approach, and a process for finalizing any post-closing adjustment. Seasonal swings, overdue receivables, and customer deposits can materially affect that calculation. Avoid counting the same liability twice.

Ask for a sample closing statement showing how the headline price becomes the seller’s proceeds before taxes.

Choose the structure with tax advice

An asset purchase, equity purchase, or merger can produce different tax results, consent requirements, and exposure to existing liabilities. Identify the assets or ownership interests included, excluded assets, and liabilities the buyer proposes to assume.

Bring tax advisors into the discussion before signing. Purchase-price allocation and proposed tax elections can affect each side’s economics. If the structure remains open, say so and identify what must be resolved. A later change in structure may require revisiting the price.

Make exclusivity fit the work

Exclusivity gives the buyer time to investigate and negotiate while limiting the seller’s ability to pursue alternatives. That restriction has value.

Negotiate the start date, duration, prohibited activities, exceptions, and extension process. Tie the period to a credible diligence and drafting schedule. Sellers should consider whether missed buyer milestones permit an early exit; buyers should address delays caused by incomplete information. Avoid automatic extensions that continue without meaningful progress. Specify how an exclusivity termination affects any other binding obligations.

Set a workable diligence process

Identify the information the buyer needs, who provides it, and when. Set milestones for initial document delivery, financial review, the first purchase-agreement draft, and major diligence findings.

Protect the operating business while allowing a serious investigation. Establish rules for contacting employees, customers, and suppliers, and for handling competitively sensitive information. Coordinate the LOI with the confidentiality agreement. Buyers need enough access to assess risk; sellers need a process that avoids unnecessary disruption and uncontrolled disclosure.

Identify financing and approval conditions

If the buyer needs acquisition financing, specify whether financing is an intended closing condition, the proposed funding sources, and the expected timetable. Sellers should understand how much financing risk they are accepting before granting exclusivity.

Identify material landlord, lender, customer, ownership, and regulatory approvals. Allocate responsibility for pursuing them and address the proposed consequences if an essential consent cannot be obtained. A target closing date should reflect those dependencies.

Work through deferred payments

An earnout ties part of the price to future performance. Address the metric, measurement period, accounting rules, payment timing, reporting rights, and dispute process. Discuss how operating decisions after closing could affect the result and what happens if the business is resold or the seller’s employment ends.

For a seller note, discuss interest, maturity, repayment, collateral, guarantees, default remedies, and priority relative to acquisition lenders. Also address whether the buyer may offset indemnity claims against payments. These provisions determine how much payment risk stays with the seller.

Surface the major liability terms

The LOI need not resolve every representation and indemnity provision. It should surface terms that could materially change the bargain.

Discuss the proposed escrow or holdback, limits on indemnification liability, claim deadlines, and treatment of known problems. Indemnification allocates specified losses between the parties after closing. Buyers need a practical source of recovery; sellers need to understand how much of the price remains exposed and for how long.

If ongoing employment, transition services, or restrictive covenants are essential, identify the expected scope and economics early, subject to applicable law.

Be precise about what is binding

An LOI may make proposed transaction terms nonbinding while creating binding obligations concerning confidentiality, exclusivity, expenses, or dispute resolution. Identify those provisions expressly and explain when they end or survive.

The document’s title does not settle its legal effect. Wording, surrounding communications and conduct, and governing law can matter. An express commitment to negotiate in good faith can itself create obligations. Counsel should review how the LOI addresses withdrawal, definitive agreements, and any duty to continue negotiating.

Before signing, have your legal and financial advisors test the LOI against the deal you actually intend. Learn more about LMB Partners’ mergers and acquisitions practice or schedule a consultation to discuss a proposed transaction.

This article provides general information, not legal or tax advice for a particular transaction.