Deal StructureMarch 2025 · 8 min read

How to Read a Letter of Intent When Selling Your Business

Q: Is an LOI legally binding?

Most LOI clauses are non-binding, meaning either party can walk away. However, exclusivity and confidentiality clauses ARE typically binding. The purchase price and structure are not binding until the final purchase agreement.

Q: Can I negotiate the LOI?

Yes — and you should. LOIs are negotiating documents. Common items to negotiate: purchase price, exclusivity period length, earnout metrics, working capital target, and which party pays for due diligence costs.

The LOI is the most important document in a business sale — and most sellers don't fully understand what they're signing. Here's what every clause means.

Jason Taken

HedgeStone Business Advisors

A Letter of Intent (LOI) is a non-binding document that outlines the proposed terms of a business acquisition. It's not the purchase agreement — but it sets the framework for everything that follows. Once you sign an LOI, you're typically locked into exclusivity with that buyer for 30–90 days. Understanding every clause before you sign is critical.

The Key Clauses in Every LOI

Purchase price: the headline number, but also how it's structured (cash at close, seller note, earnout). Working capital peg: what level of working capital you're required to leave in the business at closing. Earnout terms: if any portion of the price is contingent on future performance, the LOI should define the metrics, measurement period, and payout schedule. Seller note terms: interest rate, repayment schedule, security. Exclusivity: the period during which you can't talk to other buyers.

The Working Capital Adjustment: Where Sellers Get Surprised

The working capital adjustment is one of the most misunderstood — and most contentious — aspects of a business sale. Buyers set a working capital target (e.g., $200K) and if you deliver more, you keep the excess. If you deliver less, the purchase price is reduced dollar-for-dollar. Sellers who drain accounts receivable or push payables before closing to maximize cash often find the adjustment eliminates the benefit. Understand your working capital requirement before the LOI.

Exclusivity: The Biggest LOI Leverage Point

When you sign an LOI, you typically grant the buyer 30–90 days of exclusivity — you can't solicit or accept offers from other buyers during this period. Buyers use this time to conduct due diligence. The risk: if a buyer finds issues during due diligence, they'll try to renegotiate the price (called a 're-trade'). You're now negotiating from a weaker position because you've been off-market for 60 days. Counter: negotiate a shorter exclusivity period (30–45 days), clear milestones, and what happens if the buyer re-trades without cause.

Representations and Warranties: What You're Agreeing To

The LOI will reference that a purchase agreement will contain representations and warranties by both buyer and seller. As a seller, reps and warranties are statements that the information you've provided is accurate and complete. If they turn out to be false, you can be liable post-closing. Key seller reps: financial statements are accurate, no material litigation pending, no undisclosed liabilities, key contracts are in good standing. Never sign representations about things you haven't verified.

Frequently Asked Questions

Is an LOI legally binding?

Can I negotiate the LOI?

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