The Letter of Intent: 12 Terms Sellers Should Check Before Signing

‍In a letter of intent business sale negotiation, sellers should check 12 terms before signing: price definition, payment mix, deal structure, working capital, debt-like items, exclusivity, financing, diligence scope, escrow, closing conditions, founder terms and binding provisions. Most are non-binding, yet they anchor the purchase agreement, so vague wording becomes the buyer's option later.

Buyers are busy. Global deal value rose 41% in the first five months of 2026, which puts the year on track to be the second-highest on record. Technology is a large part of it: deal value in technology, media and telecom climbed 48% to $472 billion over the same five months, with capital going to fewer, higher-conviction targets. More than 80% of 1,500 dealmakers expect volume and value to keep rising over the next year.

For a founder, that demand tends to arrive as a letter a few pages long. The letter of intent (LOI) is short, mostly non-binding and easy to sign on a good day. It is also the last moment you negotiate from strength, because the exclusivity clause inside it takes every other buyer off the table.

Below are the 12 LOI terms that decide what you keep, the wording that moves risk onto the seller without saying so, and the fix for each. The examples run across software, ecommerce, agencies, AI, cybersecurity, fintech, edtech and marketplaces, because the pressure points differ by business model.

What Is a Letter of Intent in a Business Sale?

A letter of intent is the buyer's written outline of a proposed acquisition: a few pages that set out the main terms before either side pays for full due diligence and a purchase agreement. In a letter of intent for a business acquisition you will usually find the price, the structure, the timetable and an exclusivity period.

It helps to know the neighbors. An indication of interest (IOI) comes earlier: a price range, no exclusivity, several buyers still in the room. The purchase agreement comes later and is the binding contract, with warranties, indemnities and closing mechanics. The difference between a letter of intent and a memorandum of understanding is mostly the name. An MOU does the same job, shows up more in joint ventures and cross-border deals, and in the UK the same paper is called heads of terms. The label never decides what binds. The wording does.

One more comparison comes up: a letter of intent versus a partnership agreement. They do different jobs. A partnership, LLC or shareholders' agreement governs how co-owners run a company together. It only enters a sale when you roll part of your equity into the buyer's vehicle, and then the LOI should summarize the governance terms you will live under.

The importance of a letter of intent in business transactions comes down to three things. It fixes the economics both sides will be held to. It starts exclusivity. And it sets the scope and the clock for due diligence. Everything in the purchase agreement gets argued against what the LOI said, or failed to say.

Is a Letter of Intent Binding?

Partly. Price, structure and closing terms are almost always stated as non-binding. The no-shop, the confidentiality terms, the cost-sharing clause and the choice of law bind from signature. Some letters add a commitment to negotiate in good faith, and that commitment has teeth.

The legal implications of a letter of intent are easy to underestimate. Under Delaware law, a common choice in deal documents, an agreement to negotiate in good faith is a contract in its own right, and a party that breaks it can owe damages measured by the lost deal. The wording decides which side of that line you are on. In December 2025 a US federal appeals court applying Delaware law found no duty to keep negotiating under a signed term sheet for a $12 million stake in an Intel business, because the document made clear that neither party took on any legal obligation by signing it. So read for three things: a paragraph that lists exactly which sections bind, a clear statement that nothing else does, and a deliberate choice about any good-faith clause, since it binds you as much as the buyer.

How do you withdraw from a business sale letter of intent once it is signed? Either side can stop negotiating the non-binding terms at any time. What you cannot do is talk to another buyer until exclusivity ends. That makes the termination paragraph the real exit: a fixed end date, a right to end exclusivity if the buyer changes price or terms, and written notice as the mechanism. Confidentiality survives either way. Rules differ by state and country, so the governing law line is worth an hour of your M&A lawyer's time before signature.

Letter of Intent Business Sale Checklist: Which 12 LOI Terms Should Sellers Check?

Every LOI covers price. The good ones cover all 12 points below, which are the key elements of a business sale letter of intent. Where yours is silent, the gap gets filled later, in the buyer's draft, while you are locked in exclusivity.

1. Purchase price definition. Is the number enterprise value or cash to you?

2. Consideration mix. How much is cash at closing, and how much is earnout, seller note or rollover equity?

3. Deal structure. Asset sale or stock sale, and who carries the tax cost?

4. Working capital target. What is the peg and how is it calculated?

5. Debt and debt-like items. Which liabilities come off the price?

6. Exclusivity. How long, and what ends it early?

7. Financing. Is the money committed, and by when?

8. Due diligence scope. What gets reviewed, in what order, by what date?

9. Escrow and indemnity. How much is held back, for how long, with what cap?

10. Closing conditions. Which contingencies can stop the deal?

11. Founder and team terms. What are your role, your non-compete and your team's retention?

12. Binding provisions. Which paragraphs bind, and how does the letter end?

A vague LOI does not keep your options open. It keeps the buyer's open.

How Should Price and Structure Language Read?

1. Purchase price definition

Most offers state a headline enterprise value and describe it as cash-free and debt-free. That is not the amount wired to you. Debt and debt-like items come off, working capital moves it up or down, escrow is held back, and deferred payments come later, if they come. That also answers a common question about the impact of a letter of intent on business valuation: the LOI does not change what the company is worth. It decides how much of that value reaches your account.

The fix: ask for a one-page bridge from enterprise value to cash at closing, attached to the LOI, with every deduction named. If you have not tested the headline number against the market yet, get a free valuation before you respond.

2. Consideration mix

Deferred pay does a lot of work in smaller deals. In deals under $10 million, the median earnout was 39.2% of deal size in 2025, against roughly 27% to 28% for deals of $50 million to $500 million and about 20% above that. Handled well, an earnout lets a buyer pay for growth you believe in. Handled loosely, it is the part of the price you never collect. In January 2026 the Delaware Supreme Court left most of a $1 billion award in place against an acquirer that had promised, and failed, to prioritize approvals for its target's flagship product, and in March the Chancery Court reinstated a game studio's CEO and extended its earnout period by 258 days after the buyer took operating control.

The fix: put the mechanics in the LOI, not just the amount. Name the metric (ARR for a SaaS company, gross profit for an agency, contribution margin for an ecommerce brand), the period, the cap, the accounting basis, the buyer's operating commitments and what happens if you are let go without cause. For a seller note, state the rate, term, security and ranking. For rollover equity, state the percentage and your information and exit rights. Our guide to earn-outs in tech M&A covers the detail.

3. Deal structure

"Structure to be determined" is a tax decision left to the other side. In an asset sale, buyer and seller both report the price allocation to the IRS on Form 8594, and that allocation drives what you owe. In a stock sale, founders of qualifying C corporations may hold qualified small business stock. For shares acquired after July 4, 2025, the exclusion is 50% of the gain at three years, 75% at four and 100% at five, subject to a cap that starts at $15 million. The benefit attaches to a sale of your shares, so a late switch to an asset purchase can put it at risk.

The fix: state the structure in the LOI, agree the allocation principles, and add that any change requested by the buyer comes with a gross-up for your extra tax. Have tax counsel confirm your position before signature, wherever you are based.

How Is Working Capital Treated in an LOI?

4. Working capital target

The peg is the amount of net working capital you agree to leave in the business at closing. Come in below it and the shortfall is deducted from the price, one for one. Come in above it and you are paid the difference. It is a standard mechanism in private-company deals, and the wording matters as much as the number. In a 2025 Delaware dispute over a price adjustment, the court deferred to the independent accountant's calculation under a clause that called for GAAP applied consistently with the company's past practices, wording agreed months before anyone argued about it.

The fix: put the calculation method in the LOI itself. Use an average of the last 12 month-ends, with seasonal swings taken into account, on the same accounting policies as your historical financials, with a collar so small differences do not trigger a payment, and attach a worked example. Seasonal models need extra care. An ecommerce brand that builds inventory for the fourth quarter, an edtech company with enrollment cycles or a marketplace holding merchant payables will show very different working capital depending on the month. Sellers in the UK and Europe can also ask for a locked box, which fixes the price off a past balance sheet and removes the post-closing adjustment.

5. Debt and debt-like items

"Debt-free" sounds simple until the buyer's list of debt-like items arrives. Bank debt is obvious. The arguments are about deferred revenue, accrued bonuses, unpaid sales tax, customer deposits, deferred capital spending and, for AI companies, committed compute contracts. For a SaaS business that bills annually in advance, treating deferred revenue as debt at face value can take most of a year's prepayments off the price, even though serving those customers costs a fraction of that.

The fix: a closed list of debt items in the LOI, deferred revenue counted at cost to serve or left in working capital, and one sentence stating that no item is counted twice.

How Long Should LOI Exclusivity Last?

6. Exclusivity

The exclusivity clause (lawyers call it a no-shop) stops you from courting or talking to any other buyer until a stated date. It binds from signature, and it is the one clause that changes your position the day you sign.

So what do signed deals show? We reviewed letters of intent, term sheets and LOI announcements filed with the SEC between January 1 and November 12, 2026 that state a fixed exclusivity period for an acquisition, merger or business combination. Across 25 of them, the median was 63 days. Sixty days was the most common figure (9 of 25) and 90 days came second (6 of 25). The shortest ran 17 days and the longest 180. It is a public-company sample weighted toward small caps and SPACs, so treat it as a reference point and not a market study.

The number is only half of LOI exclusivity. The filings also show what surrounds it. One letter renews exclusivity automatically for 15 days if the parties are still working in good faith. Another carves out one party's right to raise financing during the no-shop. Details like these decide how the period feels from the inside.

The fix: a fixed end date counted from signature, no automatic extension, and an early end if the buyer asks to reduce the price, misses a milestone (diligence list in week one, an opening draft of the purchase agreement by day 30) or goes quiet. Carve out the conversations you need to keep having, such as existing investors and ordinary-course financing. If the buyer wants longer, trade it for something specific, like an agreed peg method or an escrow cap. Exclusivity is what you pay for the buyer's diligence spend, so the LOI should say what you get for it.

What Should the LOI Say About Financing and Due Diligence?

7. Financing contingency

An offer that is "subject to financing" lets the buyer walk at no cost. Credit is available: banks kept lending standards for large and middle-market business loans basically unchanged in the third quarter of 2026, while asking more of smaller borrowers. A buyer with real funding can show it.

Smaller deals need a closer look. Where the buyer is borrowing under the SBA 7(a) program, capped at $5 million for each loan, the SBA lending rules that took effect on October 1, 2026 require the buyer to put in at least 10% equity on an acquisition, show debt service coverage of 1.25 times, and obtain an independent quality of earnings report once the price reaches $3 million. A seller note counts as buyer equity only when the seller agrees to take no payments at all, principal or interest, until the SBA loan is repaid, and even then it can make up at most half of the required equity. If the LOI includes a seller note, ask whether the lender will insist on that standstill.

The fix: how to include financing terms in a business sale letter of intent comes down to four lines. Sources and uses of funds. Proof of funds or a lender letter by a set date. No financing condition, or one that expires early in exclusivity. For private equity buyers, an equity commitment letter. A sell-side quality of earnings report prepared before you go to market means the lender's version brings no surprises.

8. Due diligence scope

Buyers now arrive better informed. Nine in ten organizations use generative AI in their M&A work, and acquirers size up a target with AI tools well before any formal bid. That is good news for a prepared seller: diligence after the LOI should confirm, not explore.

The risk sits in open-ended wording, such as "satisfactory completion of due diligence in buyer's sole discretion", unlimited requests, or early access to source code, pricing and customer lists for a buyer who also competes with you.

The fix: name the workstreams (financial, tax, legal, technical, commercial), require the request list within five business days and set an end date. Stage the sensitive material. Code review happens through a third party or late in the process. Customer calls wait until the purchase agreement is nearly agreed. A clean team handles anything competitively sensitive. Expect the questions to follow your model: training data rights and open-source licences for AI, security certifications and incident history for cybersecurity, licences and regulator consents for fintech, student data compliance for edtech, and GMV and take-rate reconciliations for marketplaces.

Which LOI Terms Quietly Shift Risk to the Seller?

Four terms rarely make the headline and often move the most money. They are also where common mistakes in drafting a letter of intent for a business sale tend to hide, usually behind the word "customary".

9. Escrow, indemnity and insurance

Whether the deal uses representations and warranties insurance changes the math. With a policy in place, most claims go to the insurer and the amount held back from your proceeds can be far smaller. An LOI that says nothing here invites a first draft with a larger holdback, a longer claims period and open-ended special indemnities.

The fix: state the escrow percentage and release date, the cap, the deductible, the time limit for claims, whether insurance will be used and who pays for it. Add that the escrow is the buyer's only recourse apart from fraud.

10. Closing conditions

Every contingency is a door the buyer can leave through. Watch for "customary conditions", board or investment committee approval still to come, an undefined "material adverse change", third-party consents and key employees signing new contracts. Regulatory conditions are narrower than many founders expect: US antitrust filings apply only to deals above $133.9 million under the 2026 thresholds, though fintech licences and foreign investment reviews can still add steps.

The fix: the way to address contingencies in a business sale letter of intent is to make the list closed. Each condition gets an owner and a date. The buyer confirms its internal approvals are already in hand. "Material adverse change" is limited to events specific to your business, not the wider market.

11. Founder and team terms

"Key employees to enter into agreements satisfactory to buyer" postpones your own job terms until you have the least room to negotiate them. Restrictive covenants belong here too. A non-compete is a normal part of selling a company, so its scope and duration are yours to settle now, not after exclusivity starts.

The fix: put your role, pay, term and severance in the LOI, along with what happens to unvested equity, the size of the retention pool and whether it comes out of the price or on top of it. Limit the non-compete to the business being sold. Where the price includes an earnout, being dismissed without cause should trigger payment of it.

12. Binding provisions

This is the fine print that binds on signature. Confidentiality clauses in business sale letters of intent should keep your existing NDA alive, cover the existence of the talks, and stop the buyer hiring your people or approaching your customers for at least a year if the deal ends. Expenses should sit with whoever incurs them. A clause asking you to reimburse the buyer's costs or pay a break fee does not belong in a seller's LOI. Governing law, dispute forum and the termination date complete the set.

The fix: list the binding paragraphs by number, say that everything else is non-binding, and decide on purpose whether a good-faith negotiation clause is in or out.

How Do You Negotiate LOI Terms Without Losing the Buyer?

Start with who holds the pen. The buyer normally drafts. In a managed sale process, your advisor sends bidders a process letter asking them to address specific terms, so the letters arrive comparable. If you are wondering how to draft a letter of intent for selling a business from the seller's side, the practical answer is a marked-up version of the buyer's letter, or a short term sheet covering the 12 points above.

Templates help less than people hope. A letter of intent template for a business sale gives you headings, not your numbers. For a sample letter of intent for a business sale, look at real ones: signed LOIs are public on the SEC's EDGAR full-text search, which beats any example PDF. What a template cannot show is the gap between weak and seller-friendly wording:

• Working capital, weak: "The price assumes working capital will be at a normal level when the deal closes."

• Working capital, seller-friendly: "The target is the average month-end net working capital for the 12 months before closing, measured under the Company's existing accounting policies. No adjustment applies unless the difference exceeds $[Y]. Seller's worked example is attached."

• Exclusivity, weak: "Seller will deal only with Buyer until a definitive agreement is signed."

• Exclusivity, seller-friendly: "Exclusivity ends 45 days after signature, or earlier if Buyer asks to reduce the price or materially change the terms."

The negotiation strategies that work in a letter of intent business sale process are plain:

• Negotiate before exclusivity starts, because it is the last time the buyer is competing.

• Keep at least two bidders active until signature.

• Trade, don't concede. A longer no-shop buys a defined peg or a lower escrow.

• Rank offers by the cash that reaches you at closing, then by headline price.

• Answer in writing, and fast.

Three kinds of help earn their fee here. M&A counsel checks the binding provisions and the governing law. A tax adviser tests the structure. An M&A advisor runs the process, benchmarks the terms and keeps bidders competing, which is how you protect your interests in a business sale letter of intent without souring the relationship. The role of a lawyer in drafting a letter of intent for a business sale is narrower than many expect and worth every hour: four or five paragraphs carry most of the legal risk.

A letter of intent for selling a small business follows the same logic in fewer pages. Expect a seller note and bank or SBA financing more often, and do not skip the peg or the exclusivity terms because the deal is small. The best preparation happens earlier, through exit planning that gets financials, contracts and IP assignments in order before a buyer asks.

What Happens After You Sign the LOI?

The steps after signing a letter of intent in a business sale run in a fairly fixed order:

1. Exclusivity starts and the data room opens. The buyer sends its diligence request list.

2. Confirmatory due diligence runs across financial, tax, legal, technical and commercial workstreams.

3. The buyer's lawyers send the opening draft of the purchase agreement, and you prepare disclosure schedules.

4. Both sides negotiate the purchase agreement and the side documents: employment terms, escrow and transition services.

5. Consents, financing and any regulatory approvals are collected.

6. Signing and closing follow, often on the same day, and the working capital adjustment is settled afterwards.

Keep running the business as if there were no deal. Hitting your forecast during exclusivity is the strongest answer to any request to revisit price. And if that request comes, go back to the letter. What it said about the peg, the debt list and the buyer's right to change terms is what you will be holding.

Sign the Letter You Can Hold the Buyer To

A letter of intent business sale negotiation is short, and it is where most of the deal gets decided. Check the 12 terms, replace every "customary" and "to be agreed" with a number or a method, and sign only when the letter describes a deal you would close as written. Sellers who do that go into exclusivity with the economics settled and spend the following weeks confirming a deal, not defending one.

FE International has completed over 1,500 transactions for technology businesses, and LOI terms are where we spend much of our time on a sale. If an offer is on its way, or already on your desk, start with the number. Get a free valuation and see how the terms in front of you compare.

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