Understanding Letters of Intent (LOIs): What Really Matters and What Doesn’t

For many business owners, receiving a Letter of Intent feels like the hard part is over. After months of conversations and uncertainty, someone has finally put an offer on paper. It feels real.

One owner told me, “Once we had the LOI, I thought we were basically done.”

Six months later, after extended diligence, shifting terms, and a price reduction, the deal collapsed.

That experience is far more common than most owners expect, and it usually traces back to a misunderstanding of what an LOI actually is.

An LOI is not a deal. It’s a roadmap. And if the roadmap is poorly drawn, you can move very quickly in the wrong direction.

What a Letter of Intent Actually Is

A Letter of Intent is a framework for a potential transaction, not a binding purchase agreement.

It serves three critical purposes:

1. Establishes the economic structure of the deal
2. Defines the rules of engagement for diligence and negotiation
3. Signals whether buyer and seller are sufficiently aligned to invest time and money

Buyers use LOIs to avoid negotiating full legal documents before major issues are resolved. The LOI answers a single question:

“If diligence confirms what we believe, is this a deal worth pursuing?”

Binding vs. Non-Binding: Why the Distinction Is Often Misread

Most LOIs are largely non-binding—but that does not make them low-stakes.

Typically binding provisions include:

• Exclusivity (a no-shop period during which the seller cannot pursue other buyers)
• Confidentiality
• Governing law

Economic terms are usually non-binding, but here’s the practical reality: whatever is agreed to in the LOI becomes the default position for the definitive agreement.

Non-binding does not mean non-consequential.

What Really Matters in an LOI

1. Purchase Price—and How It’s Defined

The headline number attracts attention, but definitions determine outcomes.

Sellers must understand:

• Enterprise value vs. equity value
  (Enterprise value is the value of the business itself; equity value is what the seller actually receives after debt and cash are accounted for.)
• Cash-free, debt-free assumptions
  (The buyer expects to receive the business without excess cash or debt.)
• Working capital targets
  (The level of cash, receivables, and payables the business must deliver at closing.)

Two identical “prices” can produce very different net proceeds.

2. Deal Structure = Risk Allocation

Structure reveals how much confidence the buyer has.

Key elements include:

• Cash at close
• Earnouts (future payments tied to performance)
• Seller financing
• Rollover equity (the seller reinvests part of the proceeds into the new ownership group)

More deferral usually means more perceived risk. Structure matters as much as price—often more.

3. Exclusivity: Where Leverage Is Won or Lost

Exclusivity gives the buyer something extremely valuable: time without competition.

This is where competitive vs. single-buyer dynamics matter most:

• In competitive processes, exclusivity should be short and milestone-driven.
• In single-buyer situations, exclusivity must be earned—and carefully limited.

Key questions:

• When does exclusivity start?
• How long does it last?
• What must the buyer accomplish during that period?

A long exclusivity period with no accountability sends you far down the road—without knowing where it leads.

4. Conditions and Contingencies

Common contingencies include:

• Financing
• Diligence
• Internal approvals

The risk is not their existence, but their vagueness. Broad or open-ended contingencies allow buyers to revisit economics later under the guise of “new information.”

Clear boundaries protect momentum and leverage.

5. Timeline and Momentum

Strong LOIs include:

• Defined diligence windows
• Target signing and closing dates
• Clear next steps

Deals lose value as they lose momentum. Time is not neutral—it favors the buyer once exclusivity begins.

What Matters Less Than Sellers Think

Owners often over-focus on:

• Non-binding legal phrasing
• Courtesy language
• Minor drafting nuances with no economic effect

Negotiating these details rarely improves outcomes—and often distracts from the terms that truly matter.

The LOI as a Diagnostic Tool

An LOI tells you a lot about the buyer:

• How they view risk
• How decisive they are
• How likely they are to close

Red flags include:

• Heavy earnouts paired with long exclusivity
• Excessive contingencies
• Vague timelines

A strong LOI is usually clear, balanced, and direct.

A Simple LOI Scorecard

When evaluating an LOI, ask:

The best LOI is the one that maximizes certainty of close, not just headline price.

Common LOI Mistakes Business Owners Make

• Falling in love with the number
• Granting exclusivity too early
• Assuming issues will be “fixed later”
• Underestimating how LOI terms shape diligence

Most retrades don’t start in diligence. They start in the LOI.

How Advisors Add the Most Value at the LOI Stage

This is often the point of maximum leverage—and maximum risk.

Experienced advisors help:

• Translate technical terms into real outcomes
• Compare multiple LOIs objectively
• Stress-test downside scenarios
• Protect leverage before exclusivity begins

Once the road is chosen, it’s hard to change direction.

What Happens After the LOI—and Why It Matters Now

After signing:

• Diligence follows the LOI’s framework
• Legal documents reflect LOI assumptions
• Weak terms resurface as renegotiations

A bad LOI doesn’t slow you down.
It speeds you toward the wrong destination.

Final Thoughts: Judge LOIs by Outcomes, Not Optics

The strongest LOI is rarely the flashiest one. It’s the one that leads to a clean close on acceptable terms.

For additional questions about LOIs and other nuances of the business sales process, contact Breneman Advisors.