Quick answer: A letter of intent is a buyer’s written proposal to acquire a business, setting out price, form of payment, key adjustments, the owner’s role, the diligence plan and an exclusivity period. Most of it is non-binding, but the terms it sets are what the purchase agreement later follows, and exclusivity usually ends the seller’s leverage. Compare letters of intent by what the owner will net and how likely the deal is to close, not by the headline price.
Key points
- The headline price is only one term. The treatment of debt, cash, working capital, escrow and contingent payments decides how much of it the owner receives.
- Exclusivity is usually binding. Once signed, the seller cannot talk to other buyers for the agreed period, so negotiate the important terms first.
- Vague terms get resolved later, in diligence, when the buyer has the advantage. Ask for definitions of debt-like items and the working capital target now.
- Certainty matters as much as price. Financing conditions, the scope of diligence and approvals needed determine how likely the deal is to close.
What the letter does
After meetings with buyers, the strongest candidates submit a letter of intent, often called an LOI. It is a written proposal that says, in a few pages, what the buyer is prepared to do and on what terms. It is not the purchase agreement. It is the outline that the purchase agreement will follow, and the terms in it set the range of what is realistic to negotiate later.
Reading it well means separating three things: the economic terms that decide what the owner receives, the process terms that decide how the deal gets done, and the protective terms that decide who bears the risk if something goes wrong.
The economic terms
Price and its form. The letter states a price, but the useful question is what the price consists of. How much is paid in cash at closing? How much is deferred, contingent or reinvested? The guide to earnouts and the guide to rollover equity and seller notes explain the common forms.
Cash-free, debt-free. Most offers assume the business is delivered with no debt and no excess cash. The seller pays off the debt and keeps the cash. The letter should define what the buyer treats as debt-like, because that list reduces what the owner receives. The bridge from enterprise value to equity value shows each step.
Working capital. The letter should describe the target level of working capital, or at least the method for setting it. If the letter is silent, the buyer will set it later. The working capital peg guide explains the mechanics.
Escrow or holdback. A portion of the price may be held back to cover claims after closing. The letter should state how much, for how long and what it secures.
Taxes and structure. Whether the deal is an asset purchase or a stock purchase changes the tax result for both sides. The comparison of asset and stock sales explains why this is worth raising at the outset.
The process terms
Exclusivity. The period during which the seller may not negotiate with others. Look at its length, whether it can be extended automatically, and what rights the seller has if the buyer lowers the price or misses milestones.
Diligence scope and timetable. The letter should say what the buyer intends to review, how long it expects to take and who will be involved. A broad, open-ended scope with a loose timetable gives the buyer more room to renegotiate.
Financing. If the buyer needs to borrow to close, the letter should say how far arranged the financing is and whether closing depends on it. A financing condition shifts the risk of failure to the seller.
Approvals and conditions. Board approvals, investment committee sign-off, third-party consents and any regulatory filings all affect certainty. The letter should identify them.
Timetable to closing. A target date is useful as a measure of the buyer’s seriousness and organization.
The protective terms
The owner’s role. Does the buyer expect the owner to stay? In what role, for how long, with what compensation? An expectation of a long commitment is often tied to concerns about key-person risk.
Non-compete and non-solicit. The scope, duration and geography of restrictions on the owner after closing.
Employees. Any commitments about retention, compensation or benefits for the team, and who the buyer intends to keep.
Representations and indemnification. Most letters leave these to the purchase agreement, but some mention the buyer’s expectations, such as limits on liability or insurance. Sellers should note what is proposed.
Break fees or expense reimbursement. Occasionally included in larger transactions. Understand who pays if the deal fails.
Illustrative example: Two letters, compared on what the owner nets
Buyer A offers $16,200,000, subject to financing, with a broad definition of debt-like items, a working capital target not yet defined, and a 90-day exclusivity period that renews automatically. Buyer B offers $15,500,000 in cash with no financing condition, a defined list of debt-like items, a stated working capital method, and a 60-day exclusivity period.
Buyer A’s headline is $700,000 higher. If its broad debt-like definition and an undefined working capital target together take $900,000 from the seller, and the financing condition leaves a real chance the deal does not close, Buyer B’s offer may deliver more, with more certainty. The figures are invented to show the comparison and are not benchmarks.
Questions to ask before signing
- What will I net after debt, debt-like items, working capital, fees and taxes?
- How much of the price is certain at closing, and how much depends on later events?
- What can cause the price to change, and who decides?
- How long am I bound to this buyer, and can I leave if the terms change?
- How certain is the financing and the buyer’s internal approval?
- What does the buyer expect from me after closing?
- Which terms are written precisely, and which are left to be agreed later?
Working with your team
The letter is short, and most of its force comes from what it leaves out. An attorney reviews the binding provisions, a tax advisor reviews the structure, and an advisor compares the economics against other offers and against what buyers are likely to pay. A valuation prepared in advance gives the owner a reference point, so that a proposal that looks strong on price but weak on terms can be recognized as such. The overview of the sale process shows where the letter sits among the stages.
Frequently asked questions
Is a letter of intent legally binding?
Usually only in part. Most letters state that the price and terms are non-binding, while specific provisions such as confidentiality, exclusivity and the sharing of expenses are binding. The wording of each letter controls, so an attorney should review it before it is signed.
Can the buyer change the price after signing?
Because the price terms are normally non-binding, a buyer can propose a change, and diligence findings are the usual reason. The best protection is a letter that states the assumptions behind the price clearly, a seller who has already found and explained the weak points in the numbers, and a process that was competitive until signing.
What is an exclusivity period?
A period, set in the letter, during which the seller agrees not to solicit or negotiate with other buyers. It gives the buyer time to complete diligence without being outbid in the middle of its work. Sellers negotiate its length, and ask for the right to end it if the buyer changes the terms.
Should I sign the first letter I receive?
Not without comparing it with the alternatives. If the process is competitive, several letters may arrive together, and the strongest on net proceeds and certainty is not always the highest on price. If only one arrives, a seller can still negotiate its terms before signing and should not accept the language as presented.
Thinking about a sale or an acquisition?
The Impetus Group provides sell-side and buy-side M&A advisory, from preparation and buyer outreach to negotiation and closing. A transactional valuation is often the first step, scoped and priced separately.
Related guides
- From Enterprise Value to Equity Value: What the Owner Receives: Enterprise value is the price of the business. Equity value is what owners receive after debt, debt-like items, cash and working capital. See the bridge.
- Net Working Capital Peg: How the Working Capital Adjustment Works: The working capital peg sets the level of working capital a seller must leave in the business at closing. See how it is calculated, negotiated and adjusted.
- Earnouts Explained: How Contingent Consideration Works in a Sale: An earnout ties part of the purchase price to future results. Learn how earnouts are structured, why buyers propose them and how sellers can value the risk.
- Rollover Equity and Seller Notes: Deferred Consideration Explained: Rollover equity and seller notes defer part of a sale price. Learn how each works, how their risks differ and what to ask before accepting either.
- How an M&A Sale Process Works: Stages From Preparation to Closing: A step-by-step view of a sell-side M&A process: preparation, marketing, bids, the letter of intent, diligence, the purchase agreement and closing.
- How to Prepare for a Business Valuation: A Practical Checklist: What to gather and decide before a business valuation: financials, add-back support, customer data, owner role and liabilities, and why each matters to a buyer.
- Partner Buyout Valuation: How to Value a Co-Owner’s Share of a Business: How to value a partner's share in a buyout: the standard of value, discounts, valuation date, buy-sell agreement terms and how payment is structured.
This guide is general education. It is not a valuation opinion, appraisal, investment advice, or legal or tax advice. How these guides are made.