A letter of intent feels like a formality — a short, non-binding document that gets you to the "real" negotiation. In practice, the LOI sets the roadmap for everything that follows. Price, structure and the major deal terms are far easier to negotiate before signing than after, once exclusivity is granted and both sides have started spending on diligence and legal fees.
Before you sign, it is worth slowing down on a handful of points that are easy to treat as boilerplate and expensive to get wrong.
1. Confirm the structure asset sale or stock sale
The LOI should state, at minimum, whether you are acquiring assets or equity. This single decision affects which liabilities you inherit, how the purchase price is taxed, which contracts and licenses need consent to transfer, and how employees move over. If the LOI is silent or vague on structure, that ambiguity will resurface — usually at a worse moment, once you are past exclusivity.
2. Understand what "purchase price" actually means
A headline number rarely reflects what you will actually pay. Look closely at how the LOI treats working capital adjustments and the target working capital level, seller notes, earnouts or other deferred or contingent consideration, debt and transaction-expense payoffs at closing, and indemnity holdbacks or escrow amounts. Each of these can move the effective price meaningfully. The LOI does not need to resolve every mechanical detail, but it should establish the framework clearly enough that the definitive agreement is a negotiation over documentation — not a renegotiation of economics.
3. Read the exclusivity clause carefully
Most LOIs include an exclusivity, or "no-shop," period during which the seller cannot solicit or negotiate with other buyers. This is standard and reasonable — but the length of that period, and what happens if the deal does not close within it, deserve attention. An exclusivity period that is too short can force you into diligence and negotiation under unnecessary time pressure.
The LOI is where leverage is highest for both sides. Once exclusivity is granted, that leverage shifts — often permanently.
4. Identify what is and is not binding
Most LOI provisions are explicitly non-binding, but a handful typically are: exclusivity, confidentiality, governing law, and sometimes a break-up fee or expense reimbursement. Make sure you know exactly which sections bind you and which remain open for negotiation — and do not assume that "non-binding" language protects you from every commercial and reputational consequence of walking away later.
5. Plan your diligence scope before you sign
Signing the LOI starts the clock on due diligence, financing, and legal documentation — often simultaneously. Before you sign, have a clear view of what diligence you need (financial, legal, operational, customer and employee-related), who is running each workstream, and how SBA or other financing requirements will layer into the timeline. An LOI signed without this groundwork tends to produce a rushed, reactive diligence process.
The bottom line
An LOI is not the finish line, and it is not truly "just a formality" either. It is the document that determines how much real negotiating room remains once the deal moves into definitive documentation. Buyers who invest the time to get the structure, price mechanics and key terms right at the LOI stage tend to have a smoother and less expensive path to closing.
