What to Check Before You Sign a Letter of Intent

The Moment Your Bargaining Power Peaks

Before an LOI, you can talk to as many buyers as you like. Each one knows others may be looking, and that pressure keeps offers honest.

Once you sign, you usually agree to stop talking to anyone else for a set period. The buyer then spends weeks inside your books with no competition and every chance to find reasons to adjust.

That is why the letter matters more than its length suggests. Whatever is vague in it tends to get settled later in the buyer's favor, because by then you have stopped marketing the company.

What a Letter of Intent Usually Covers

Every buyer and every law firm writes these a little differently, but most LOIs for a company your size touch on the same core points.

• Price. The total amount the buyer proposes to pay, and sometimes how they arrived at it.
• Structure. How that price is paid: cash at closing, a bank or SBA loan, a seller note, an earnout or rollover equity.
• Asset or stock sale. Whether the buyer buys the company's assets or your ownership shares, which changes taxes and which liabilities follow.
• Seller note terms. If you are financing part of the price, the amount, interest rate, length and whether it sits behind the bank.
• Earnout. Any part of the price that depends on future results, and how those results will be measured.
• Working capital. How much cash, receivables and inventory must stay in the company at closing, often called the working capital peg.
• Exclusivity. How long you agree not to talk to other buyers.
• Timeline. Target dates for due diligence, the purchase agreement and closing.
• Your transition role. How long you stay on, in what role, and whether you are paid for it.
• Other conditions. Financing, landlord consent for a lease assignment, key employee agreements, a non-compete and any escrow or holdback.

Binding and Nonbinding Parts, in General Terms

Most LOIs say that the business terms, like price and structure, are not binding. Either side can still walk away until a final purchase agreement is signed.

A few sections usually do bind both sides from the day of signing. These commonly include exclusivity, confidentiality, who pays which costs and which state's law applies.

Nonbinding does not mean unimportant. Buyers and their lawyers draft the purchase agreement from the LOI, and asking to reopen a term later reads as backing out of a deal you already agreed to.

The wording in each letter controls what is binding, and that varies. Have a business attorney read yours before you sign. This guide is general information, not legal advice.

Price Is Only the First Line

Two offers with the same headline number can be very different deals. What matters is how much you receive at closing and how much depends on things you will not control.

For example, a price that is mostly cash with a modest seller note is a very different outcome from the same price split among cash, a long note and an earnout tied to next year's revenue.

Most Main Street deals are funded with some mix of cash, an SBA loan and a seller note. SBA 7(a) loans go up to $5 million, according to the SBA, and lender rules can shape how a seller note is written.

When you compare offers, line up the cash at closing, the amount at risk and the terms of anything paid later. Our guide on seller financing goes deeper on notes.

Terms Worth Pushing On Before You Sign

You will not win every point, and you should not try to. Focus on the items that are hardest to fix after exclusivity starts.

1. How the price was built. If the buyer states the earnings figure they used, any later change in their view of earnings has a clear reference point.
2. The working capital peg. A vague peg is one of the easiest ways for a price to shrink at closing. Ask how it will be set and what period it is based on.
3. Earnout details. Pin down what is measured, who keeps the books, how long it runs and what happens if the buyer changes how the company operates.
4. Seller note protections. Rate, length, personal guarantee and what happens if payments stop.
5. Exclusivity length. Shorter is better for you. Tie any extension to the buyer showing real progress on financing and due diligence.
6. Your role after closing. Agree on how long you stay, how many hours, and your pay, so a transition does not quietly turn into a job you did not want.
7. Asset or stock. Talk to your CPA before you agree. The choice can change what you keep after tax more than a modest change in price.

Your CPA should also check the tax side of the structure before you commit. If your company is in North Carolina, our guide to sales tax when selling a business covers one item buyers will raise.

Why Signing a Buyer's Draft Alone Is Risky

Many owners first see an LOI because a buyer called them directly. The buyer may say you can skip a broker and save the fee. That pitch usually comes from someone hoping to buy cheaply.

The buyer's draft is written to protect the buyer. It often leaves the earnings figure unstated, the working capital peg loose and the exclusivity open ended, and every gap gets settled later from their side of the table.

Professional buyers sign these letters often. Many owners sign one once in their life. That gap in experience is where money is lost, usually without the seller realizing it until closing.

An unsolicited offer also tells you nothing about what the market would pay. With only one buyer, you have no way to know whether the number is fair, and no backup if they walk during due diligence.

Before signing anything, get a real valuation and independent advice. Our page on how we work explains how we introduce owners to an experienced broker who can review terms and bring other buyers to the table.

What Happens After You Sign

The buyer begins due diligence, which can include a quality of earnings report on larger deals. Lawyers draft the asset purchase agreement or stock purchase agreement, and any lender starts its own review.

Keep running the company at full speed through this stretch. A dip in sales during exclusivity gives the buyer a reason to revisit the price you already agreed on.

If you have an offer in hand or expect one soon, talk to someone on your side before you sign. Request a free, private valuation or call (704) 555-0187.