Letter of Intent: The Terms That Matter Before Exclusivity

Owners often treat the letter of intent as the finish line. The number looks right, the buyer sounds serious, and the pressure to sign today is real. Then exclusivity begins, and the competition that created the owner's leverage quietly disappears.

A letter of intent is not a contract to sell. It is a short framework that sets the price, the structure, the exclusivity period, and the conditions the buyer expects to satisfy. Those terms decide the real outcome far more than the headline figure does.

This guide covers the commercial terms owners should resolve before they sign an LOI, and why the moment before exclusivity is the strongest point in the process.

Why the Letter of Intent Is More Than a Price Indication

An LOI is mostly non-binding. It records what the buyer and the seller have agreed in principle, and it sets the shape of the process that follows. The parts that usually bind are confidentiality, exclusivity, and any break fee or expense provision. The price and the structure are an intention, not an obligation.

That distinction matters because the LOI is a preview of diligence. Every assumption in it becomes a workstream after signing. The EBITDA definition, the working capital peg, the customer retention story, and the treatment of add-backs all return as questions the buyer will test with documents and interviews.

A seller who signs a loose LOI signs up for a loose process. A seller who resolves the commercial terms first signs up for a defined one.

A letter of intent is a plan for the process. The number on the first page matters less than the terms that surround it.

Headline Value Versus Actual Consideration

The first number buyers discuss is enterprise value. It is not the amount the owner receives at closing. Enterprise value must be bridged to equity value, which adds cash and subtracts debt and debt-like items. Transaction expenses and a working capital adjustment usually follow.

The consideration mix matters just as much. Cash at closing is certain. The rest is not:

• Escrow and holdback. Money set aside for a period to cover indemnity claims, released only if no claim is made.
• Earnouts. Contingent payments tied to a future metric, paid only if the metric is met.
• Rollover equity. A reinvestment in the buyer's new entity, worth what that entity is worth later.
• Seller notes. Deferred cash that depends on the buyer's balance sheet and the deal documents.

An illustrative example shows the gap. A deal with a $20,000,000 headline might deliver $14,000,000 in cash at closing, with $3,000,000 in escrow, $2,000,000 tied to an earnout, and $1,000,000 in rollover. The headline is flat. The cash outcome is 70 percent of it, and the rest depends on terms written on later pages. This example is illustrative only.

Exclusivity and Process Leverage

Exclusivity gives one buyer the exclusive right to negotiate for a set period, often 60 to 90 days. It removes competition, and with it the seller's main source of leverage. Once exclusivity starts, the buyer knows no competing offer exists.

Three habits keep exclusivity healthy:

• Keep it short. A period long enough to do the diligence work is enough. Extensions should be earned against milestones, not granted by default.
• Define what ends it. A missed milestone, a failure to deliver diligence materials, or an unreasonable price change should let the seller reopen the process.
• Do not gift it early. A buyer who wants long, open-ended exclusivity before diligence has started is asking the seller to carry the buyer's own uncertainty.

The seller's leverage is highest before exclusivity. That is the moment to settle terms, not after.

Earnouts, Rollovers, and Working Capital

These three terms often appear first in the LOI. Each one shifts value or risk away from the seller, and each one is easier to shape before advisors are deep in documentation.

Working capital. The peg sets the level of working capital the seller must deliver at closing. A peg set too high moves cash out of the seller's proceeds. Owners should agree on the methodology and a collar before they sign, and should base it on historical seasonality, not on one strong month.

Earnouts. A contingent payment is only valuable when the metric is measurable, the target is achievable, and the seller is protected against buyer actions that impair payment. Owners should settle the metric, the measurement window, and the control protections early. See our guide to earnouts in a business sale for the terms that make them collectible.

Rollover equity. Rollover is a new investment in the buyer's entity, not deferred cash. Its value depends on the new capital structure, the governance rights, and the path to liquidity. Owners should treat it as a separate decision. See rollover equity in a business sale for the questions that decide whether it pays.

Conditions, Financing, and Diligence Scope

The LOI also defines what must happen before the buyer is obligated to close, and how much of the seller's business the buyer gets to examine. Both deserve attention before signing.

• Financing. Many buyers need debt. Ask whether the financing is committed or still subject to approval. A lender that tightens leverage after diligence can change what the buyer can pay.
• Diligence scope. Agree on the workstreams, the data room, and the level of access. Broad, open-ended access invites scope creep and distraction.
• Closing conditions. List the conditions clearly, including regulatory filings, third-party consents, and key employee agreements.
• Timeline. Set a realistic schedule for diligence, drafting, and closing, with named owners for open items.

The Terms to Resolve Before Signing

Before you sign an LOI, resolve these terms in writing:

1. Price and basis. Enterprise value, and how it bridges to equity value.
2. Consideration mix. Cash at closing, escrow, earnout, rollover, and seller notes.
3. Working capital. The peg, the methodology, and any collar.
4. Contingent terms. The earnout metric and measurement, or the rollover rights, if either is proposed.
5. Exclusivity. The length, the milestones, and the events that end it.
6. Diligence. The scope, the data room, and the access rules.
7. Financing. Whether the buyer's funding is committed.
8. Conditions and timeline. What must be true to close, and by when.
9. Reps and indemnity framework. The general shape of post-closing recourse.
10. Costs. Who pays which fees, and any break fee.

The Practical Decision

Sign an LOI when the commercial terms are clear, the financing is credible, and the exclusivity period is short and earned. Push back when the price is firm but the terms around it are vague. Defer when the buyer cannot explain how the deal will be funded. Walk when the buyer wants exclusivity before diligence has even begun.

The best time to shape these terms is before exclusivity, while an alternative still exists. Pressure-test the commercial terms before signing an LOI. Bull Holdings can help you read the terms that decide real proceeds, prepare the diligence materials buyers will request, and keep your leverage intact before exclusivity begins.

---

This article reflects general market observations in the lower middle market advisory space. Owners considering a transaction should consult with a qualified M&A advisor and legal counsel specific to their situation and industry.

---

Sources to verify before publishing

No external statistics are cited in this draft. All figures are illustrative.