Blog: VLP Speaks

M&A Letters of Intent: Five Terms Sellers Should Get Right Early – A Blog Post by David Goldenberg

Posted on Oct 14, 2026 in Mergers & Acquisitions, Blog by David Goldenberg

A letter of intent may be preliminary, but some of the most important economics and leverage in an M&A transaction are established before the definitive agreement is ever drafted. For sellers, getting a few key terms right at the LOI stage can materially affect what happens at closing.  

For a business owner considering a sale, receiving a letter of intent can feel like a major milestone. The buyer has put a valuation on the company, the parties appear aligned, and the transaction is moving forward.

But an LOI is more than a ceremonial step on the way to a purchase agreement.

Although most of its provisions are typically nonbinding legally, the terms in the LOI are more fixed than you might think.  The LOI establishes the basic economic framework for the transaction. Once it is signed, particularly if the seller has agreed to exclusivity, renegotiating an issue that could have been addressed earlier becomes considerably harder.

Here are five areas sellers should understand before signing.

1. Purchase Price Means More Than the Headline Number

A $30 million offer is not necessarily a $30 million payment at closing.

Is the transaction cash-free and debt-free? Will there be an escrow or holdback? Is part of the consideration paid in buyer stock or rolled into the acquiring company? What happens to transaction expenses?

The LOI should provide enough detail to understand what the seller is actually receiving, not simply the number at the top of the page.

2. Working Capital Can Move the Economics

Many acquisitions include a working-capital adjustment designed to ensure that the business is delivered with a “normal” level of operating capital.

The concept sounds straightforward. The details frequently are not.

How the working-capital target is calculated, what accounts are included, and how unusual items are treated can move the closing payment significantly.  Sellers assume that the working capital that has worked for them for years is sufficient.  Buyers often have a very different number in mind.  We have seen this create a price swing of several hundred thousand dollars, even on smaller transactions. Worse, buyers often don’t present their working capital number until late in the transaction (after all diligence is complete).

3. Earnouts and Rollover Equity Need Real Terms

If part of the purchase price depends on future performance, the LOI should do more than say “20% earnout.”

What determines whether the earnout is achieved? Who controls the business during the measurement period? How much discretion does the buyer have over expenses?

Similarly, if a private equity buyer wants the owner to “roll” equity into the post-closing company, the percentage being rolled is only the beginning. Sellers should understand what they will own, the basic economic rights of that equity, and how it can ultimately become liquid.

4. Exclusivity Changes the Seller’s Leverage

Buyers understandably want assurance that they will not spend substantial time and money on diligence while the seller shops the deal elsewhere.

But a 60- or 90-day exclusivity period is meaningful. Once the seller takes the company off the market, the buyer may have greater leverage to raise diligence concerns, adjust terms, or extend the timetable.

Sellers should consider both the length of exclusivity and whether there are mechanisms to prevent the process from drifting.

We have seen sellers agree to a long exclusivity period, only to sour on the buyer early in the process.  They are then stuck with few options other than to remain out of market for a material period of time.

5. Know What Is—and Is Not—Binding

Most LOIs expressly state that the transaction itself is nonbinding until definitive agreements are signed. Certain provisions, however, are commonly binding—including exclusivity, confidentiality and perhaps expense reimbursement terms.  It should be very clear which terms are binding and which are not.

Just as important, sellers should not assume that every issue omitted from the LOI can easily be negotiated later. Once the principal economics have been accepted and the buyer has begun diligence, practical negotiating leverage may have shifted.  If a term is important to you, we typically recommend putting it in the LOI.

The Bottom Line

An LOI does not need to resolve every provision that will appear in the purchase agreement. Trying to negotiate the entire transaction at the LOI stage would defeat much of its purpose.

But the important economic assumptions and deal dynamics should be understood before the seller signs.

For owners, that is often the moment when experienced M&A advice is most valuable: before expectations have hardened, exclusivity has begun, and the leverage created by a competitive process has disappeared.