A letter of intent (LOI) is the term sheet that fixes the price and structure of a private company sale before the buyer begins confirmatory due diligence, and most of it is deliberately non-binding. Two provisions almost always bind: exclusivity, which bars the seller from talking to other buyers for a set period, and confidentiality. Because a seller's negotiating leverage peaks the moment before signing, the LOI should pin down price, structure, working capital methodology, rollover equity, and escrow in real detail; a vague LOI is an open invitation to retrade.
LOI vs. IOI: two documents at two different stages
An indication of interest (IOI) comes first. It is a short non-binding letter, often one to three pages, in which a buyer states a valuation range and its general intentions based on the marketing materials it has seen so far. In a managed sale process, sellers use IOIs to cut a broad buyer list down to the handful invited to management meetings.
The letter of intent comes after those meetings. It is longer and far more specific, and it comes from the one buyer (occasionally two finalists) the seller is prepared to take the company off the market for. An LOI states a specific price rather than a range, describes the structure and financing, and asks for exclusivity. Signing it effectively ends the auction, which is exactly why its terms deserve so much attention.
What is binding and what is not
A well-drafted LOI states explicitly which sections bind and which do not. Courts generally respect that allocation, but sloppy drafting, or conduct that treats the deal as already done, can pull nominally non-binding terms into enforceable territory. This article is educational information, not legal or tax advice; have qualified M&A counsel and tax advisors review any LOI before you sign it.
Provisions that typically bind
- Exclusivity (the no-shop). The seller agrees not to solicit, negotiate with, or share information with other buyers for a defined period. This is the buyer's compensation for spending real money on diligence, and it is fully enforceable.
- Confidentiality. Both sides agree to keep the discussions and exchanged information secret, often by reference to the non-disclosure agreement (NDA) already signed earlier in the process.
- Expenses and governing law. Each party usually bears its own costs, and the LOI names the state law that governs the binding provisions.
- Break-up fees, occasionally. Fees payable if a party walks away are a public-deal feature; in private middle-market LOIs they are rare, partly because negotiating one takes as much effort as negotiating the actual purchase agreement.
Provisions that typically do not bind
- Price and consideration. The headline number and the split among cash, seller note, earnout, and rollover are statements of current intent.
- Structure. Asset purchase versus stock purchase versus merger.
- Closing conditions and timing. Diligence completion, financing, consents, and the target closing date.
- Post-closing intentions. Employee retention, brand continuity, the owner's consulting role.
Non-binding does not mean unimportant. The non-binding terms anchor everything that follows. Both sides treat unexplained departures from the LOI as bad faith, and a specific written LOI position is the seller's best evidence in any later argument about what was agreed.
The economic terms to nail down at LOI
Guidance Goodwin published for lower middle market deals (roughly $10 million to $100 million) makes the point plainly: a credible LOI states an unambiguous headline price and breaks out cash at close, escrow, holdbacks, earnouts, rollover equity, and any contingent consideration, and it proposes the purchase price adjustments, including the working capital peg on a cash-free, debt-free basis. Here is what a seller should insist on seeing in writing before granting exclusivity.
| Term | What to specify at LOI | Why it matters |
|---|---|---|
| Purchase price and mix | Headline number plus the split: cash at close, seller note, earnout, rollover equity, escrow | "$12 million" means very different things at 100 percent cash versus 60 percent; the mix determines what the seller actually banks at closing |
| Structure and tax | Asset vs. stock sale (or merger); any Section 338(h)(10) election; who bears the incremental tax | Structure can move six or seven figures of tax between the parties; settling it later means settling it with no leverage |
| Working capital | Cash-free, debt-free basis; the peg methodology (for example, a trailing twelve-month average of net working capital) and which accounts and debt-like items count | Purchase price adjustments show up in the vast majority of private deals, and an undefined peg is the most common retrade lever |
| Rollover equity | Percentage rolled, class of security, valuation basis, and basic governance and liquidity rights | Rolling into a different security than the sponsor holds, at an inflated valuation, quietly cuts the real price |
| Escrow / holdback | Size as a percentage of price, duration, and whether representations and warranties insurance (RWI) replaces most of it | Escrow terms set how much of the price stays at risk after closing, and for how long |
| Exclusivity | Length, diligence and drafting milestones, and a seller right to terminate if the buyer retrades | Exclusivity is the seller's largest concession; milestones keep the buyer on schedule |
A concrete example. A distributor with $2.4 million of adjusted EBITDA signs an LOI at $12 million, 5.0x. The LOI specifies $9.0 million in cash at close, a $1.2 million rollover (10 percent of the price) into the same class of units the sponsor holds, a $600,000 indemnity escrow (5 percent) releasing at 12 months, and a $1.2 million seller note with a stated rate and maturity. It sets a working capital peg of $1.5 million, defined as the trailing twelve-month average of net working capital on a cash-free, debt-free basis, with the included accounts listed on an exhibit. Any of those numbers can still move in diligence, but now every move requires the buyer to explain what changed.
The working capital line deserves particular respect. SRS Acquiom's deal-terms research finds purchase price adjustment provisions in more than 90 percent of recent private-target deals, a post-closing true-up that moves the price by an average of roughly 0.9 percent of deal value in the buyer's favor, and separate adjustment escrows with a median size around 1 percent of deal value. On a $12 million sale, that average swing exceeds $100,000. On a peg that was never defined, it can be several times that.
Why detail at the LOI stage prevents retrading
Retrading is when a buyer, after the LOI is signed, demands a lower price or worse terms than the seller already accepted. It works because leverage flips at signing: the other bidders have been sent away, the seller's team is weeks deep into diligence, and the owner is mentally committed to the exit. A buyer who understands all that can manufacture reasons to reprice.
Vagueness is the raw material of a retrade. Every term left "to be negotiated in the definitive agreement" is a term the buyer negotiates after the seller has lost the practical ability to walk. Two LOIs can both say $10 million; if one defines the working capital peg and the other promises a "customary working capital adjustment," the second seller can quietly give back several hundred thousand dollars at closing while the headline price never changes.
Goodwin's advice to buyers drafting competitive LOIs points the same direction: keep closing conditions narrow (essential regulatory approvals, confirmatory diligence, material contracts) and avoid sweeping "subject to due diligence" qualifiers and overly broad financing outs, because sellers and their counsel read those as retrade insurance. Sellers should read them exactly that way.
Practical protections a seller can negotiate into the binding portion of the LOI:
- Finish the negotiation before exclusivity starts. Structure, peg methodology, escrow, indemnity basics, and diligence scope should be agreed on paper while competing bidders still exist.
- Milestones inside exclusivity. For example: diligence request list within one week, first draft of the purchase agreement by day 30, diligence substantially complete by day 45. Missed milestones end exclusivity.
- A retrade termination right. If the buyer proposes a material price cut or term change not tied to a specific diligence finding, the seller may terminate exclusivity immediately.
- Short initial exclusivity, earned extensions. Granting 45 days with extensions conditioned on progress beats granting 120 days up front.
Typical timeline from LOI to close
Buyers commonly ask for 30 to 120 days of exclusivity, and sell-side practitioners often report agreed periods landing between 45 and 75 days. The windows have been stretching: Goodwin's review of its own private equity deal flow found that only 6 percent of 2021 deals with exclusivity periods ran 61 days or longer, versus nearly 40 percent of 2022 deals, most of those at 76 days or more, as heavier diligence and slower debt markets lengthened timelines.
From LOI signature, most private company sales in this size range aim to close in roughly 60 to 120 days. A typical sequence looks like this:
- Weeks 1-2: kickoff. The buyer issues diligence request lists, the seller opens the data room, and the quality of earnings (QoE) review, a diligence-grade re-examination of the company's reported earnings, begins.
- Weeks 3-6: confirmatory diligence. Financial, legal, tax, insurance, and operational workstreams run in parallel while buyer's counsel circulates the first draft of the purchase agreement.
- Weeks 6-10: documents and financing. The parties negotiate the definitive agreement and disclosure schedules, the buyer finalizes debt commitments, and third-party consents (landlords, key customers, licenses) get chased down.
- Weeks 10-13: sign and close. Most private deals sign and close simultaneously. Funds flow, the escrow is funded, and the closing working capital estimate is set, with the final true-up following in the months after closing.
What blows the schedule: financial records that cannot support the QoE, slow lender processes, consent-heavy contracts, and, on larger transactions, antitrust filings. Sellers who build the data room, QoE support, and working capital analysis before the LOI is signed compress the window and shrink the surface area for retrades; that preparation-first sequencing is the workflow sell-side platforms such as Bankerly.ai are organized around. Figures above are general educational ranges drawn from published market studies, not a prediction for any specific deal.
Sources
- Goodwin: Crafting a Competitive LOI in Lower Middle Market M&A
- Goodwin: Durations in M&A Exclusivity Periods Increased Significantly Since 2021
- SRS Acquiom: M&A Deals — Key Trends from the 2025 Deal Terms Study
- Axial: What to Expect in an M&A Letter of Intent
- Axial: Why Exclusivity Periods Are Scary and How Sellers Can Minimize Risk
- Divestopedia: Anatomy of a Letter of Intent
Frequently asked questions
- Is a letter of intent legally binding when selling a business?
- Mostly no. The price, structure, and closing terms in an LOI are almost always stated as non-binding expressions of intent. But specific provisions, typically exclusivity, confidentiality, expenses, and governing law, are drafted to be enforceable contracts. A well-drafted LOI names exactly which sections bind. Courts can treat ambiguous LOIs unpredictably, so have M&A counsel review the document before signing.
- What is the difference between an IOI and an LOI in M&A?
- An indication of interest (IOI) is an early, short, non-binding letter stating a valuation range, used to decide which buyers advance to management meetings. A letter of intent (LOI) comes later, from one selected buyer, with a specific price, deal structure, and an exclusivity request. Signing an LOI effectively takes the company off the market while that buyer completes due diligence.
- How long does it take to close after signing an LOI?
- Most private company sales aim to close roughly 60 to 120 days after the LOI is signed. That window covers confirmatory financial, legal, and tax diligence, negotiation of the definitive purchase agreement, debt financing, and third-party consents. Deals stretch when financial records are messy or financing is slow, and exclusivity periods have generally lengthened as buyer diligence has gotten heavier.
- Can a buyer change the price after the LOI is signed?
- Yes. Because the price term is non-binding, a buyer can propose a lower price during exclusivity, a practice called retrading. Sellers cannot prohibit it outright, but they can make it costly: negotiate detailed terms before granting exclusivity, require any price change to be tied to specific diligence findings, and reserve the right to terminate exclusivity if the buyer materially retrades.
- What should be included in a letter of intent to buy a business?
- At minimum: the purchase price and its components (cash at close, escrow, seller note, earnout, rollover equity), the structure (asset or stock sale) with key tax elections, the working capital peg methodology on a cash-free, debt-free basis, escrow size and duration, financing sources, the exclusivity period with milestones, and a clear statement of which provisions are binding.
Considering a sale in the next few years? See what a prepared process looks like.
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