Letter of Intent: What Every Seller Should Know Before Signing

The Letter of Intent (LOI) is the most consequential document you will sign before the definitive purchase agreement. It sets the boundaries of every negotiation that follows: price, structure, timeline, and how much of the purchase price you actually take home at closing. Once you sign, the power balance between you and the buyer shifts dramatically. What you agree to now determines whether you spend the next 90 days negotiating from strength or playing defense.

This guide breaks down what the LOI commits you to, which terms matter most, how to spot retrading risk before it costs you money, and what your M&A advisor should do before you put your name on the page.

Why the LOI Is the Highest-Stakes Moment in Your Sale

The letter of intent is where deal economics first take shape. In Axial's 2025 Dead Deal Report, renegotiation challenges accounted for 14.7% of Axial-sourced transactions that failed after an executed LOI. The report does not measure completed deals whose terms changed during diligence.

The LOI matters because it creates the framework that either protects your deal value or gives the buyer room to chip away at it.

What an LOI Actually Commits You To

Most LOI provisions are non-binding. The purchase price, representations, and closing conditions are typically expressed as intentions, not enforceable commitments. But the provisions that are binding carry real consequences.

Exclusivity (the no-shop clause) is almost always binding. Once you sign, you cannot talk to other buyers, solicit competing offers, or use competitive tension to improve your terms. Confidentiality provisions bind both parties. And in many LOIs, expense reimbursement or breakup fee provisions are enforceable.

The practical effect: a non-binding price indication paired with a binding exclusivity period gives the buyer time and leverage to renegotiate that price downward with no competitive pressure keeping them honest.

How Your Bargaining Position Changes After You Sign

Before the LOI, you hold the stronger hand. Multiple buyers may be competing for the deal. You control the timeline. You decide who gets access to your financial data. The buyer knows that if they push too hard, you can walk to another bidder.

After signing an LOI with exclusivity, you are committed to negotiating with one buyer for the agreed period. Your management team and key employees may learn about the sale through the diligence process. Your attention shifts from running the business to answering buyer requests. Each week that passes deepens your commitment and makes it harder to restart the process if the deal falls apart. That is why it is important to clarify key economic terms before granting exclusivity.

This is why ACP treats the LOI as the moment to fight hardest on terms. Your bargaining power will never be higher than the day you have a signed offer on the table and competing buyers still in the process.

The Terms That Matter Most to Sellers

Not every line in the LOI carries equal weight. Some provisions are standard language that rarely changes. Others can move your net proceeds by hundreds of thousands or millions of dollars. Here is where to focus.

Purchase Price and Deal Structure

The headline number gets the most attention, but how the price is structured matters just as much. A $25M offer with $5M in earnouts, a $2M escrow holdback, and a working capital adjustment mechanism is a very different deal than $25M in cash at closing.

The SRS Acquiom 2026 Deal Terms Study analyzes more than 2,300 private-target acquisitions valued at $569 billion and examines earnouts, escrows, and purchase price adjustments. These deal terms can change the value a seller actually receives.

At the LOI stage, push for clarity on several points. How much of the purchase price is deferred through earnouts, seller notes, or holdbacks? What is the proposed escrow amount and duration? If the buyer is proposing an earnout, what are the performance metrics, measurement period, and your ability to influence the outcome post-closing?

Exclusivity (No-Shop) Periods and How to Limit Them

The exclusivity period is the most dangerous provision in the LOI for sellers. It removes your primary source of leverage: the ability to walk to another buyer.

Standard exclusivity periods range from 45 to 90 days, but buyers will push for 120 days or longer if you let them. Every additional week of exclusivity benefits the buyer and costs you. Here is why: the longer the exclusive period, the more time the buyer has to find diligence issues that justify a price reduction. Meanwhile, your business may experience normal fluctuations that give the buyer ammunition to retrade.

Negotiate exclusivity down to the shortest period the buyer will accept. Forty-five to 60 days is reasonable for most lower-middle-market deals. Include an automatic termination if the buyer fails to meet specific milestones (such as delivering a draft purchase agreement within 30 days). Add a provision that exclusivity expires if the buyer attempts to reduce the purchase price below a defined threshold.

Working Capital Language in the LOI

Working capital adjustments are one of the most common sources of post-LOI price erosion. The mechanism is straightforward: the buyer and seller agree on a "target" level of net working capital that the business should have at closing. If actual working capital falls below the target, the purchase price is reduced dollar for dollar.

The problem arises when the LOI is vague about how the working capital target will be calculated. Buyers often include general language like "working capital will be based on a trailing twelve-month average" without specifying which accounts are included, how inventory is valued, or whether seasonal adjustments apply.

At the LOI stage, insist on a clear definition of what constitutes working capital for your business. Push for agreement on the calculation methodology before you sign, not after, when you have already given up exclusivity. A well-run process addresses this before the LOI stage through a detailed quality of earnings analysis that both sides can reference.

Due Diligence Scope and Timeline

The LOI should define the boundaries of due diligence, not leave them open. An unrestricted diligence provision lets the buyer request anything, at any time, with no obligation to close. According to the Axial 2025 Dead Deal Report, non-QoE diligence findings were the number one cause of broken LOIs in 2025, accounting for 25.3% of failed deals. That includes everything from customer concentration concerns to regulatory issues discovered during the diligence process.

Negotiate for a defined scope of diligence, a clear timeline, and specific milestones that the buyer must meet to maintain exclusivity. If the buyer cannot complete diligence within the agreed window, they should need your consent to extend the period.

Retrading: The Risk Most Sellers Underestimate

Retrading is what happens when a buyer signs an LOI at one price and then uses the diligence period to justify a lower number. It is one of the most damaging experiences a seller can go through, and it happens far more often than most business owners expect.

How Buyers Use the LOI to Lock You In, Then Adjust the Price

The pattern is predictable. The buyer submits an aggressive LOI, often at the high end of what the business might be worth. The seller signs, grants exclusivity, and begins the diligence process. The seller's management team spends weeks answering questions, producing documents, and meeting with the buyer's advisors.

Then, 60 or 75 days into the process, the buyer comes back with a revised offer. They have found something in diligence: a customer contract that is up for renewal, a margin trend they do not like, or a difference between management-reported EBITDA and the quality of earnings analysis. The revised price is 10% to 20% lower than the LOI.

At this point, the seller faces a terrible choice. Accept the lower price after months of distraction and disclosure, or restart the process with other buyers who now know the deal fell apart.

What the Data Shows About Broken LOIs

The numbers paint a clear picture of how frequently deals break down after LOI signing. The Axial 2025 Dead Deal Report found that QoE-related EBITDA discrepancies caused 21.3% of broken LOIs in 2025, more than double the 10.6% rate in 2023. When you combine QoE issues (21.3%), non-QoE diligence findings (25.3%), and outright retrading (14.7%), over 61% of broken deals trace back to price or value disagreements that surfaced after the LOI was signed.

These numbers tell sellers two things. First, prepare your financials and consider a sell-side quality of earnings report before going to market. The EBITDA number in your LOI needs to hold up under scrutiny. Second, structure your LOI to limit the buyer's ability to use normal diligence findings as a pretext for renegotiation.

Contract Language That Protects You from Retrading

Several LOI provisions can reduce your exposure to retrading. With transaction counsel, consider a price floor or walk-away threshold tied to a negotiated percentage, and an exclusivity period with milestones for raising material diligence concerns. The right terms depend on the deal and must be written into the agreement to have effect.

The ABA 2025 Private Target Deal Points Study found that 21% of the 139 definitive agreements in its sample were asset deals. Deal structure can affect how value is allocated and negotiated. Whatever the structure, ask counsel to address what happens if the buyer attempts to change the economics after signing.

What Your Advisor Should Do Before You Sign

A good M&A advisor earns their fee at the LOI stage. This is where deal structure gets set, competitive tension gets preserved or lost, and the terms that determine your net proceeds get established.

Running a Competitive Process

The strongest protection against unfavorable LOI terms is competition. When multiple qualified buyers are submitting offers simultaneously, each buyer knows that an aggressive retrading attempt will send you to the next bidder. Your advisor should be running a structured process that generates multiple LOIs, not steering you toward a single buyer.

At ACP, we manage the LOI phase to maximize competitive tension. That means controlling the timeline so that all serious buyers submit offers within the same window, providing each buyer with enough information to submit a credible offer (so the LOI price is more likely to hold through diligence), and creating conditions where buyers compete on terms, not just price. A $22M all-cash offer with 45 days of exclusivity and a tight working capital definition may be worth more than a $24M offer with 90 days of exclusivity, an open-ended diligence scope, and vague earnout language.

The LOI Review Checklist

Before signing any LOI, your deal advisor and transaction counsel should confirm the following items are addressed. The purchase price is clearly stated as either enterprise value or equity value. The deal structure specifies how much is paid at closing versus deferred. The exclusivity period and any milestone-based termination rights are defined. The working capital target methodology is specified, or there is a clear process for agreeing on it. Due diligence scope and timeline are bounded. Any earnout provisions include clear metrics, measurement periods, and seller protections. The LOI identifies which provisions are binding and how they terminate. A negotiated walk-away threshold can address retrading risk.

Common LOI Mistakes That Cost Sellers Money

The same seller mistakes appear again and again in lower-middle-market transactions. Understanding the valuation of your business and the LOI's role in preserving that value is critical.

The first mistake is signing the first LOI that arrives without waiting for competing offers. A single offer gives the buyer maximum leverage. Even one additional bidder changes the dynamic entirely.

The second mistake is focusing exclusively on the headline price and ignoring structure. A $30M offer sounds better than a $27M offer, but not if $8M of the first offer is in earnouts with performance targets you cannot control post-closing.

The third mistake is accepting long exclusivity periods without termination triggers. Ninety days of exclusivity with no milestones is an invitation for the buyer to slow-walk diligence and retrade at day 80.

The fourth mistake is leaving working capital language vague. "To be determined during diligence" is not a working capital provision. It is a blank check for a post-LOI price reduction.

The fifth mistake is signing without professional M&A advisory and legal review. A transaction team can identify which provisions are standard, which are aggressive, and which are red flags for retrading. The cost of review at the LOI stage is small compared with the value at risk.

FAQs

What is a letter of intent in a business sale?

A letter of intent is a document that outlines the proposed terms of a business acquisition before the buyer and seller negotiate a definitive purchase agreement. It typically includes the purchase price, deal structure, exclusivity period, due diligence timeline, and key conditions to closing. Most LOI provisions are non-binding, meaning neither party is legally obligated to complete the transaction. However, certain provisions like exclusivity and confidentiality are usually binding and enforceable.

Is an LOI legally binding?

Most LOI terms are non-binding, including the purchase price and deal structure. However, specific provisions are typically binding and enforceable. These include the exclusivity (no-shop) clause, which prevents the seller from talking to other buyers during the agreed period. Confidentiality obligations, expense reimbursement provisions, and governing law clauses are also commonly binding. The LOI itself should clearly state which provisions are binding and which are not. Sellers should have legal counsel review the document before signing to understand their actual obligations.

How long should an exclusivity period be?

The appropriate exclusivity period depends on the transaction and the work left to complete. Sellers should negotiate for the shortest practical period and seek milestone-based termination rights. For example, the parties can agree on a deadline for a draft purchase agreement or major diligence workstreams, with an express right to end exclusivity if those milestones are missed.

What is retrading in M&A?

Retrading occurs when a buyer signs an LOI at one price and later attempts to reduce the purchase price or change deal terms during due diligence. Axial's 2025 report attributes 14.7% of its broken executed LOIs to renegotiation challenges, a broader category than retrading alone. Buyers may cite diligence findings like EBITDA discrepancies, customer concentration, or operational risks. Sellers can negotiate price-floor provisions and preserve backup options where possible.

Can I negotiate the LOI terms?

Yes. The LOI is a negotiation, not a take-it-or-leave-it document. Sellers can and should negotiate the purchase price, deal structure, exclusivity period, working capital methodology, due diligence scope, and any earnout or holdback provisions. The LOI stage is when your bargaining power is at its peak because the buyer has not yet secured exclusivity and competing bidders may still be in the process. An experienced M&A advisor can help you identify which terms to push on and where the buyer is likely to have flexibility.

What happens after I sign an LOI?

After signing an LOI that includes exclusivity, the buyer begins due diligence. During this phase, the buyer and their advisors may review your financial records, customer contracts, employee agreements, legal compliance, tax history, and operations. A buyer may commission a quality of earnings report while counsel drafts the definitive purchase agreement. The schedule depends on the deal and the agreed exclusivity period. If diligence confirms the buyer's expectations, the parties negotiate the final agreement and move toward closing.

Should I have an advisor review my LOI?

Yes. An M&A advisor and transaction counsel can identify provisions that create retrading risk, overly long exclusivity periods, vague working capital language, and unfavorable deal structures. The LOI sets the framework for negotiations that follow. Advisors can also help you compare offers beyond headline price, including deal certainty and expected net proceeds at closing.

What if the buyer changes the price after signing the LOI?

Because price terms in many LOIs are non-binding, a buyer may propose a lower price during due diligence. This is called retrading. Your options depend on the binding terms of your LOI. If you negotiated an enforceable walk-away threshold, you may be able to end exclusivity and return to other buyers. If you ran a competitive process, you may have backup bidders ready. Ask transaction counsel what the agreement actually allows before taking action.