What a letter of intent is
A letter of intent sets out the price and shape of the deal before the lawyers write the definitive agreement. The element first-time sellers find counterintuitive is this: the price is usually non-binding, and your obligations usually are binding. The buyer is not yet committed to buying. You are committed, from the moment you sign, to negotiating only with them.
Exclusivity is what you are selling
The binding clause is exclusivity: for a set period, commonly written as sixty to ninety days, you take the business off the market while the buyer verifies everything. That is a reasonable thing for a serious buyer to ask. It is also the moment all your leverage transfers to them, because your alternatives have agreed to stop existing for the duration.
The consequence is one of the few genuinely simple rules in this process: every term that matters gets negotiated before the LOI is signed, while you still have alternatives. Anything left vague in the LOI gets resolved during exclusivity, and during exclusivity, vague resolves in the buyer’s favor.
The same price, four different deals
Two million dollars can arrive as any of the following, and they are not worth the same amount. The figures are illustrations of structure, not market data:
- All cash at close. The cleanest and the rarest. Worth accepting a somewhat lower headline to get.
- $1.6M at close, $400K earnout. The last piece arrives only if the business hits targets after closing, under an owner who is no longer you. Judge the deal at $1.6M and treat the rest as upside.
- $1.5M at close, $500K seller note. You are lending the buyer half a million dollars, repaid over years, secured by a business you no longer control. Fine when the buyer is strong; ask for the same evidence a bank would.
- $2M with $300K held in escrow. Standard mechanics, but how much and for how long is negotiable, and the working capital peg beside it can quietly move six figures either way.
The same $2M, four different deals
Cleanest and rarest; worth a lower headline
Judge it as a $1.6M deal with upside
You are the lender; require a lender's evidence
Standard; negotiate the amount and the duration
Questions to ask before signing
- How much is cash at close, as opposed to earnout, note, and escrow?
- Is the buyer's financing committed, or still to be arranged? An LOI contingent on financing that does not exist yet is an aspiration with an exclusivity clause attached.
- How exactly is the working capital peg calculated, and by whom?
- What happens if diligence runs past the exclusivity period: does it extend automatically, or do you get your leverage back?
- How long must you stay after closing, and at what pay?
None of these questions offend a serious buyer. Serious buyers answer them daily. The parties inconvenienced by the questions are precisely the ones the questions exist to reveal.
Where this fits: the offers step, before anything is signed, and it is where comparing offers side by side on terms earns its keep. Next in the series: what happens after you sign.