A Letter of Intent is the most pivotal document in the sale of a business. It is the written offer from a buyer that outlines the proposed purchase price, deal structure, key terms, and conditions under which they intend to acquire your company. Once signed, it shifts the entire dynamic of the transaction — you move from marketing mode to execution mode, and the clock starts running on due diligence, legal documentation, and closing.
For lower middle market business owners selling a company worth $3 million to $30 million, the LOI is where deals are won, lost, or fundamentally reshaped. Understanding what every section means, what is negotiable, what is standard, and where the traps hide is essential to protecting your outcome.
What an LOI Typically Contains
A standard Letter of Intent in a lower middle market business sale covers seven core areas: purchase price and consideration, deal structure, representations and warranties expectations, due diligence scope and timeline, exclusivity provisions, closing conditions, and confidentiality terms.
The purchase price section specifies the total enterprise value the buyer is offering and how that value will be paid. This might be all cash at closing, a combination of cash and seller financing, cash plus an earnout tied to future performance, or cash plus equity rollover if the buyer wants you to retain a minority stake. The form of consideration matters as much as the headline number because a $10 million offer with $7 million at close and $3 million in earnouts is a fundamentally different deal than $10 million in cash.
The deal structure section specifies whether the transaction will be an asset purchase or a stock purchase, which has significant tax implications for both parties. It also typically addresses working capital adjustments, which define how much cash, inventory, and receivables stay with the business versus go to the seller at closing.
Binding vs. Non-Binding Provisions
Most LOIs are structured as non-binding with respect to the core economic terms — meaning the buyer is not legally obligated to complete the purchase at the stated price. However, certain provisions within the LOI are typically binding, and these are the ones that create real obligations.
The exclusivity clause — also called a no-shop provision — is almost always binding. It prevents you from soliciting or entertaining competing offers for a specified period, usually 60 to 120 days. This is the buyer’s protection for the time and money they will spend on due diligence. The length and terms of exclusivity are negotiable, and pushing for a shorter period (45 to 60 days with defined extension conditions) protects you if the buyer drags their feet.
The confidentiality provision is typically binding and survives even if the deal does not close. It restricts both parties from disclosing the terms of the LOI and any confidential information exchanged during due diligence.
The expense allocation provision specifies who pays for what during the due diligence and closing process. Each party typically bears their own legal and accounting costs, but the allocation of specific transaction expenses like escrow fees, transfer taxes, and environmental assessments should be clearly defined.
The Working Capital Adjustment
Working capital adjustments are one of the most misunderstood and contentious elements of any LOI. The concept is straightforward: when a buyer acquires your business, they expect to receive a “normal” level of working capital — the current assets minus current liabilities needed to run the business on a day-to-day basis. If the business has more than the agreed-upon target at closing, the seller gets the excess. If it has less, the purchase price is reduced.
The dispute typically arises around what constitutes “normal” working capital. Buyers often propose a target based on a trailing average that may not reflect seasonal patterns or recent changes in the business. Sellers need to ensure the methodology is fair and accounts for the natural fluctuations in their specific business. Getting this wrong can shift hundreds of thousands of dollars between buyer and seller at closing.
Earnouts and Contingent Consideration
If any portion of the purchase price is tied to future performance — commonly called an earnout — the LOI should define the metric being measured, the measurement period, the payment schedule, and who controls the business decisions that affect the metric during the earnout period.
Earnouts create inherent tension because the seller wants the number to be as high as possible while the buyer now controls the business operations that drive that number. Without clear protections in the LOI and the definitive purchase agreement, a buyer can make operational decisions that technically reduce the earnout payment while benefiting the business long-term.
If you are offered an earnout, negotiate for clearly defined metrics tied to revenue rather than EBITDA (revenue is harder to manipulate), contractual commitments that the buyer will operate the business in ordinary course during the earnout period, quarterly or semi-annual payment schedules rather than a single lump sum at the end, and dispute resolution mechanisms for disagreements over the calculation.
Due Diligence Scope and Timeline
The LOI typically defines the scope and duration of the buyer’s due diligence investigation. A standard due diligence period in the lower middle market is 45 to 90 days, during which the buyer’s team will examine your financial records, contracts, legal compliance, employee matters, customer relationships, technology systems, and environmental exposure.
Sellers should negotiate for a specific list of due diligence categories rather than an open-ended “all information” request, reasonable time limits on each phase of due diligence, clear milestones that indicate the buyer is progressing rather than stalling, and defined break fees or deposit forfeitures if the buyer walks away without cause after a specified date.
What to Negotiate Before Signing
Everything in an LOI is negotiable, but some elements have more leverage before you sign than after. The purchase price and structure obviously lead the list, but experienced sellers also negotiate exclusivity length, working capital methodology, earnout terms and protections, non-compete scope and duration, transition period expectations, and employee treatment commitments.
The most important negotiating principle is to resolve as many material terms as possible at the LOI stage. Issues that are left vague or deferred to the definitive agreement tend to get resolved in the buyer’s favor because by that point you have invested months of time, disclosed sensitive information, and face the sunk cost of restarting the process.
Red Flags in an LOI
Not all LOIs are created equal, and certain patterns signal that a buyer may not be operating in good faith. Excessively long exclusivity periods (120+ days) with no milestones suggest the buyer wants to lock you up while they continue evaluating alternatives. Vague purchase price language like “subject to further analysis” or “to be determined based on due diligence findings” gives the buyer room to re-trade after you have stopped talking to other parties.
Overly broad representations and warranties expectations at the LOI stage suggest the buyer’s legal team will be aggressive in the definitive agreement. Requests for operating control or significant decision-making authority during the pre-closing period signal a buyer who wants the benefits of ownership before they have actually paid for it.
The Role of Your M&A Advisor
Your M&A advisor’s most critical value-add occurs at the LOI stage. They should be helping you evaluate the overall attractiveness of the offer in context of market comparables, identify terms that are non-standard or buyer-favorable, negotiate improvements to the deal structure before you sign, manage competing offers to create leverage, and ensure the LOI sets you up for a smooth path to closing rather than a contentious negotiation over the definitive agreement.
An advisor who has been through dozens of transactions knows which LOI provisions become real problems later and which are standard language that both sides accept. That pattern recognition is worth the advisory fee many times over when a single LOI term can shift hundreds of thousands of dollars.
If you are considering selling your business and want to understand what a strong LOI process looks like, schedule a confidential conversation with our team. We help business owners navigate every stage of the transaction, from preparation through closing.