In the M&A process, the letter of intent (LOI) is where interest becomes intent and leverage begins to shift. For founders, this document marks the inflection point between exploratory discussions and structured negotiations.
While an LOI is often framed as a “non-binding”, the truth is more nuanced. The LOI sets expectations, establishes exclusivity, and defines key financial and legal terms. Done well, it protects your downside and positions you to shape final terms. Done poorly, it cedes ground before you’ve truly begun the hard negotiating with the potential buyer.
Learn what an LOI in M&A actually does, how to read it with a founder’s eye, and why disciplined negotiation in this stage can protect the deal value.
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At its core, the LOI is a formal, written declaration from a buyer expressing intent to acquire your business, typically following initial meetings, shared financials, and exploratory alignment.
Unlike a term sheet, which is often used earlier in capital raises, or an non-disclosure agreement (NDA), which governs confidentiality, the LOI is deal-specific and outlines high-level terms for a potential acquisition. These include the purchase price, structure (e.g., cash vs. equity), exclusivity period, and a closing timeline.
It typically precedes the due diligence process and drafting final agreements. While most of its terms are non-binding, certain provisions such as confidentiality, exclusivity, and sometimes break fees are legally enforceable.
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Many founders underestimate how much leverage is gained or lost at this stage, and how much risk is already taking shape. Just like unsophisticated buyers can throw out multiple LOIs without real intent, only to back out later, leaving founders frustrated after investing valuable time and resources.
For instance ,exclusivity is one of the most consequential terms. By signing an LOI with exclusivity, you’re agreeing not to solicit or entertain other offers for a specified period, typically from 60 to 90 days. With only one party at the table, both sides can invest in diligence and deal structuring without distraction, accelerating the progress toward a potential close.
Additionally, terms agreed at this stage, particularly around structure and legal protections, often set early expectations. While not always binding, these terms can influence the tone of future negotiations. Adjusting valuation or deal structure later may be perceived as backtracking, especially in founder-led businesses where internal governance may be less formal or not yet institutionalized.
An LOI outlines more than just a headline number. It provides a preliminary sketch of how and when that number will be paid. The structure of the deal can significantly affect the founder’s actual proceeds, tax outcomes, and risk exposure. The headline number is only part of the story. Understanding how value is structured and delivered is where experienced M&A guidance makes the difference.
Here are the core economic terms founders should pay attention to:
The total consideration offered by the buyer may be made up of several components, each with different implications for value, timing, and certainty.
These adjustments are a common feature in middle-market M&A and can significantly affect final proceeds if not properly defined.
At closing, the buyer expects to receive the business with a “normal” level of working capital (e.g., cash, accounts receivable, inventory, minus accounts payable). If the actual working capital delivered is below the target, the purchase price is adjusted downward; if it’s above, it may be adjusted upward.
This refers to any obligations or liabilities that the buyer agrees to take on as part of the deal. These can include:
If the buyer does not explicitly assume liabilities, they often remain with the seller, either reducing proceeds at close or increasing post-close exposure.
Founders should map all known liabilities before LOI signing and work with advisors to determine which are expected to transfer and which must be settled before or at close. It's also crucial to understand how this affects net proceeds and whether any portion of the purchase price is being held back to account for unresolved exposures.
Beyond economics, several clauses in the LOI determine how the deal unfolds and where control resides.
As noted earlier, exclusivity provisions prevent you from soliciting other bids. These clauses require scrutiny. Consider narrowing their scope (e.g., limiting to active outreach rather than inbound interest) or reducing the term length.
Some LOIs include provisions that penalize one party for withdrawing. While break fees are more common in large-cap deals, some mid-market buyers may attempt to include them to discourage seller retrade.
Although these are typically detailed in the definitive agreement, LOIs often flag intended escrow percentages or indemnification caps. Even if non-binding, they influence buyer expectations and should be negotiated with care.
This clause carries real consequences, particularly in cross-border M&A. Binding provisions in the LOI, such as exclusivity, confidentiality, and dispute resolution, are enforceable under the governing law and jurisdiction specified in the document.
Agreeing to a legal framework unfamiliar to the seller can introduce complexity, increase cost, and risk if disagreements arise. Founders should make sure the chosen jurisdiction aligns with their legal counsel’s experience and provides a fair forum for enforcement.
The biggest risks are often invisible at signing. Founders can unknowingly enter exclusivity with incomplete prep, shaky financials, or misaligned expectations.
Headline valuation may obscure earnout-heavy structures or equity that isn’t liquid. Look beyond the number.
Once the LOI is signed, the clock starts. If financials, contracts, or cap tables are incomplete, you’re negotiating under pressure.
LOIs move quickly. But signing without legal and financial review (especially around exclusivity, indemnity, and structure) is where founders give away leverage early.
Approaching the LOI with a clear process ensures alignment and control.
At L40°, we advise founders on how to structure and negotiate their LOIs with precision. This is the moment where deal trajectory begins, not just in economics, but in leverage, process, and risk. We bring financial, legal, and strategic fluency to ensure the LOI sets the right foundation for what follows.
From exclusivity terms to structure mechanics and buyer diligence strategy, we help you assess and shape each clause, because the LOI isn’t a formality. It’s your first real negotiation. Need guidance? Contact us.
