November 24, 2024
Letters of Intent: A practical guide for small business owners
Imagine spending months on buyer negotiations, sharing confidential information, alerting your personnel about a potential sale, and spending thousands on legal fees - only for the deal to fall apart at the 11th hour. This is the reality for more than 1 in 2 business owners - more than half of all deals fall apart near the finish line, after a Letter of Intent is signed.
This shouldn't come as a surprise - most business owners sell a business only once in their lifetime, while buyers often review thousands of deals and negotiate hundreds of LOIs. This experience gap creates real risk for sellers who don't understand how to protect their interests at this crucial stage.
In this article you'll learn:
What a Letter of Intent is and why it's crucial for your sale
The key components every LOI must have
How to protect your interests during negotiations
Common pitfalls that kill deals and how to avoid them
Understanding Letters of Intent
A Letter of Intent outlines the preliminary terms for buying your business. Think of it as the blueprint for your deal - while most terms aren't legally binding, they set expectations and show both parties are serious enough to invest significant resources into getting the deal done.
You'll typically encounter an LOI after initial discussions with a buyer who has signed an NDA, reviewed your financials, and met with management. Once signed, it initiates formal due diligence and purchase agreement negotiations.
You might ask, why do we need an LOI in the first place - can’t we just skip straight to the final agreement? This is because due diligence and deal documentation are expensive and time-consuming for everyone involved:
The buyer might spend hundreds of thousands on lawyers, accountants, and advisors.
The seller will need to share highly sensitive information about their business (e.g. customer and supplier contracts) and dedicate significant management time.
Neither side wants to take these steps without alignment on the major deal points.
Now let’s explore the core components of a standard Letter of Intent.
Core Components of an LOI
While LOIs are generally non-binding, certain provisions typically ARE binding, which is why it is important to know which one is which.
Component | Binding | What It Means | |||
---|---|---|---|---|---|
Confidentiality | Yes | Protects sensitive information shared during the process | |||
Exclusivity | Yes | Prevents seller from shopping the deal around | |||
Expense Allocation | Yes | Determines who pays for what if the deal falls apart | |||
Governing Law | Yes | Sets which state's laws apply to any disputes | |||
Purchase Price | No | Total consideration for your business | |||
Payment Structure | No | How and when you'll receive the purchase price | |||
Working Capital | No | Required level of working capital at closing | |||
Closing Conditions | No | Buyer’s requirements to close the deal | |||
Post-Close Obligations | No | Your commitments after the sale (transition, non-compete) |
💡 Quick Tip: While most LOI terms aren't legally binding, they're still critically important. It's very difficult to renegotiate these points later without damaging trust or giving up value elsewhere.
💡 Quick Tip: Clearly mark which sections are binding and non-binding in your LOI to prevent confusion or potential legal issues later.
Protecting Your Interests During LOI Negotiations
Let's look at how each major component affects your deal and how to negotiate them effectively.
1. Deal Economics and Structure
Understanding the push and pull of deal economics is crucial for negotiating effectively.
What Owners Want | What Buyers Want | ||
---|---|---|---|
Maximum cash at closing | Minimize cash upfront | ||
No seller financing | Maximum seller note | ||
No earnouts or contingencies | Maximum earnout component | ||
Immediate clean exit | Extended transition period | ||
No equity rollover | Significant owner reinvestment |
Consider these smart compromises to find the middle ground:
Ask for a higher total purchase price in exchange for less cash at close
Accept a shorter duration seller note at market-rate interest rates to limit non-payment risk
Set contingencies based on reasonable baselines you can control
Define a 6-24 month transition period with clear post-sale responsibilities and compensation
Consider rolling some equity if future upside exists (especially if selling to a private equity buyer who will be looking to exit in 5-7 years)
💡 Quick Tip: Every dollar shifted from closing to later typically should command a premium in the total purchase price.
2. Process Protection and Control
These terms determine how much control you maintain during the sale process and how you protect your business.
What Owners Want | What Buyers Want | ||
---|---|---|---|
No exclusivity | Long exclusivity period | ||
Minimal information sharing | Full access to all information | ||
Broad non-compete, tight confidential terms | No non-compete and broad confidential terms |
Consider these smart compromises to find the middle ground:
Agree on a 45-60 day exclusivity period with clear buyer milestones
Propose a phased disclosure tied to deal progress
Ensure you accept industry-standard non-compete and confidentiality terms with clear carveouts
Success LOI Checklist
Consider these factors When Evaluating Your LOI | |||
---|---|---|---|
✅ | Clear purchase price and terms | ||
✅ | Reasonable timeline for closing | ||
✅ | Well-defined scope of what's included | ||
✅ | Protection of confidential information | ||
✅ | Fair exclusivity period | ||
✅ | Clear conditions and contingencies |
Why Deals Fall Apart After LOI
Despite good intentions, deals often fail during the post-LOI phase. Here are the most common reasons:
Poorly Drafted LOI
Vague or ambiguous terms lead to disputes
Key issues left unaddressed create deal-breaking surprises
Unrealistic timelines set the process up for failure
No clear termination rights
Misaligned Expectations
Vague earn-out metrics
Unclear purchase price adjustments
Poorly defined working capital targets
Ambiguous payment terms
Inexperienced Advisory Team
Using general practice attorneys instead of M&A specialists
Poor coordination between legal, tax, and financial advisors
Advisors who overcomplicate simple issues
⚠️ Critical Note: Many owners make the costly mistake of having their regular business attorney or in-house counsel review their LOI. While these lawyers may be excellent in their fields, M&A transactions require specialized expertise. Always engage an experienced transaction attorney who regularly handles business sales. They'll spot issues others miss and know market-standard terms for your industry.
Your Next Steps:
Assemble your deal team
M&A attorney
Investment banker or advisor
Tax advisor
Prepare key documents
Updated financials
Customer information
Employee details
Corporate records
Define your must-haves
Minimum cash at closing
Deal-breaker terms
Timeline requirements
Take Control of Your Exit
The Letter of Intent stage represents a critical milestone in selling your business. While the document itself may be "non-binding," the terms you negotiate now will shape your entire transaction. Getting it right requires both understanding the key elements and having the right team in place.
Don't let your deal become another failed statistic. Take these steps today:
Review our LOI checklist
Assemble your advisory team, starting with an experienced transaction attorney
Begin preparing key documents before you need them
Ready to learn more about protecting your interests during a sale? Schedule a free consultation with our M&A advisors to:
Review your specific situation
Discuss current market conditions
Evaluate your exit readiness
Plan your next steps
Preview potential buyers, for free
OffDeal leverages advanced technology and expertise to help small business owners achieve the same quality of M&A service previously reserved for large corporations. Our mission is to ensure every business owner has the opportunity to maximize their value when they're ready to sell.