When business owners think about selling their company, they understandably focus on the final operative document—the purchase agreement. However, in many transactions, the agreed-upon letter of intent (LOI) is an equally important document. Business transactions take many different paths, and we have developed a process that summarizes the general steps in a transaction: (1) information gathering and legal preparation, (2) the LOI, (3) due diligence, (4) drafting and negotiating deal documents, (5) addressing any regulatory or licensing issues, (6) coordinating with our clients’ other professional advisors, and (7) closing and payment when ownership changes.
An LOI is typically both partially binding and partially non-binding, and it functions as a roadmap for the transaction. A well-negotiated LOI can shape the entire deal. Once signed, both parties tend to operate within the LOI framework, and deviations from it may create friction, delay, or even derail the deal. For sellers, the LOI is often the point of maximum leverage. Buyers are still competing, diligence has not yet uncovered issues, and enthusiasm is high. After signing, the dynamic shifts—buyers invest time and money into diligence and often gain exclusivity, which can weaken the seller’s negotiating position.
A thoughtful LOI should go beyond just price. At a minimum, it should address deal structure, timing, purchase price payment terms, and post-closing seller obligations. Leaving these issues vague can invite renegotiation later in the process—often to the seller’s detriment.
Here are four key reasons to invest the time to negotiate a strong LOI:
1. Payment Terms. Purchase price is important, but how and when the purchase price is paid is often even more important. The LOI should clearly outline the payment structure, including whether the consideration consists of cash, seller financing, bank financing, or a combination thereof, as well as the general terms applicable to each payment method.
2. Define Deal Structure. Whether the transaction is structured as an asset sale or a stock sale has significant tax and liability implications for both parties. Addressing the transaction structure early in the process helps avoid surprises and costly renegotiations later.
3. Control the Process (Including Exclusivity). Most LOIs include an exclusivity, or “no-shop,” period of at least 90 days, during which sellers may be prohibited from marketing the business or discussing a potential transaction with other prospective buyers. Sellers should carefully negotiate the scope and duration of exclusivity to avoid becoming tied to a buyer who is struggling to secure financing, seeking investor partners, or otherwise failing to move the due diligence process forward.
4. Reduce the Risk of Renegotiation. Ambiguity invites renegotiation. A detailed LOI limits a buyer's ability to revisit key terms after due diligence has been completed, when the seller's leverage may be diminished.