Negotiating the LOI Before Granting Exclusivity
The Letter of Intent represents a major turning point in the sale of a business. Until this stage, multiple prospective buyers may still compete for the opportunity. Once the seller signs an LOI, the dynamics change significantly. The selected buyer typically receives exclusivity and begins confirmatory due diligence. For this reason, sellers should use their LOI negotiating leverage before committing to a single buyer.
Establish the Major Economic Terms
Although most LOI provisions remain nonbinding, the document establishes the framework for the transaction. Reopening major business terms later may erode trust and create unnecessary tension between the parties. It may also cause either party to question whether previously negotiated terms remain settled.
Therefore, the LOI should clearly address the purchase price, transaction structure, and form of consideration. It should also define other significant economic terms. These terms may include working capital, seller financing, earnouts, rollover equity, escrows, and other holdbacks. Before exclusivity begins, sellers should resolve as many significant economics issues as reasonably possible.
Address the Seller’s Post-Closing Role
Many sellers remain involved after closing through employment, consulting, or transition agreements. Others may retain an economic interest through an earnout or rollover equity. The LOI should address these arrangements when they represent a meaningful part of the transaction. At this point, the seller still has meaningful negotiating leverage. Postponing difficult issues or conversations may shift that leverage toward the buyer.
Provide Accurate Information Early
Sellers should provide accurate financial and operational information before accepting an LOI. Material inconsistencies discovered later may give the buyer grounds to renegotiate. Sellers should also disclose known weaknesses that could materially affect the transaction. Surprises during the confirmatory due diligence may damage credibility and threaten the deal.
Understand What Changes After Signing
Signing an LOI does not complete the transaction. However, it usually removes the seller from the competitive marketplace for a defined period. From that moment forward, the buyer will devote substantial resources to diligence and definitive agreements. Meanwhile, the seller’s alternatives become temporarily limited.
An experienced M&A advisor should negotiate the LOI with the definitive transaction already in mind. The advisor should identify unresolved issues before the seller grants exclusivity. Effective LOI negotiating leverage comes from addressing significant terms while buyers still compete. Sellers should use that leverage before choosing the buyer who moves forward.
