Buyers often present the letter of intent as a friendly formality — something to sign quickly so the “real” work can start. That framing is exactly backwards. By the time the definitive agreement is being drafted, the important decisions have already been made. They were made here.
Most of an LOI is a non-binding statement of intent, but some clauses are fully binding and you need to know which. Exclusivity, confidentiality, expense allocation, and sometimes a break fee typically bind you the moment you sign. So you can walk away from the price and still be legally locked out of talking to other buyers. Read the LOI for which parts actually have teeth.
A no-shop or exclusivity clause gives the buyer a window during which you can’t negotiate with anyone else. That’s leverage handed across the table: your only other option — walking — is off limits, and the buyer knows it. Keep the exclusivity period as short as you reasonably can, tie it to the buyer actually making progress, and don’t grant it until you’re genuinely comfortable with both the buyer and the headline terms.
Share sale or asset sale, what’s included and excluded, how working capital is treated, what happens with the real estate — these get effectively decided in the LOI and are painful to reopen once both sides feel they’ve “agreed.” Because the tax outcome often turns on structure, this is the moment to get tax advice — before you sign, not after. (This is the same share-versus-asset decision that can move your after-tax proceeds by six figures.)
“$5 million” can mean very different things depending on how much is paid at closing, how much sits in escrow or a holdback, whether there’s a vendor take-back or an earn-out, and how the working-capital adjustment is calculated. Pin down the shape of the price in the LOI, not just the figure — the figure is the part everyone remembers and the structure is the part that decides what you actually receive.
You don’t want to negotiate the entire deal in the LOI. The fine detail of representations and warranties, the indemnity caps and baskets, and the precise closing conditions belong in the definitive agreement. But set expectations for the big-ticket items so nothing ambushes you later — a buyer who springs a huge indemnity demand after exclusivity has run is a familiar story.
The LOI feels informal, and the buyer will encourage you to sign it fast to build momentum. That’s precisely the moment to have your lawyer and accountant read it. An hour of advice on the LOI is worth more than a week of it on the definitive agreement, because the LOI is where your leverage is highest and your options are still open.
If you have an LOI in front of you, don’t sign it because it’s “just a letter.” That’s the one worth reading closely.
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