The letter of intent is the deal

A letter of intent is described to sellers as a formality. Two pages, mostly non-binding, a handshake in writing. That description is wrong in a way that costs money, and it is wrong in the same way almost every time.

The LOI is the last moment at which a seller has genuine competitive leverage. Once exclusivity is granted, the buyer knows that no other bidder is being spoken to, and every subsequent negotiation happens against a clock the buyer controls. Everything the seller wants should therefore be extracted before the signature, not after it.

What the LOI actually decides

• The exclusivity period, and whether it extends automatically.
• The deal structure, which determines the tax outcome for every shareholder.
• Whether the price is on a cash-free debt-free basis, and how working capital is defined.
• The indemnity architecture: escrow size, survival periods, and whether representation and warranty insurance will be used.
• The treatment of management: rollover, retention and the employment terms of the founder.

Exclusivity is not a courtesy. It is the single most valuable thing a seller has to give, and it should be priced.

Exclusivity should be short and conditional

Thirty to forty-five days is enough for a prepared buyer. If the buyer needs ninety days, that usually means their financing is not committed or their diligence team is not resourced, and the seller is being asked to underwrite that with the only leverage they have.

Where a longer period is unavoidable, tie its extension to milestones. Financing commitment delivered by day thirty. First draft of the purchase agreement by day twenty. Failure to meet a milestone releases exclusivity. Buyers who intend to close accept these terms readily. Buyers who intend to retrade resist them, which is useful information to acquire before the process narrows.

Define working capital in the LOI

The single most common post-LOI price reduction is a working capital target set unfavourably during the purchase agreement negotiation. A twelve-month trailing average, the calculation methodology, and the treatment of specific accounts should all be stated in the LOI. It takes one additional paragraph and it removes several million dollars of retrade risk from a middle-market transaction.

Do the estate planning first

For founders, the tax consequence of a sale is decided months before signing. Transfers of equity into a trust are valued on the date of transfer, and once a letter of intent exists, a valuation professional will struggle to apply the discounts that were available a quarter earlier. Founders who begin planning after the LOI is signed routinely pay for that timing in transfer tax.

If a sale is plausible within eighteen months, the planning conversation should be happening now, and it should be happening in the same room as the transaction conversation.