Updated: August 06, 2026
Author: Calvin Hughes, Senior Partner
Most owners sign their first letter of intent thinking it locks in the deal. It doesn’t. An LOI is a framework, and most of its language is designed to be non-binding. The parts that aren’t binding will surprise you, and they’re usually the parts that matter most in the weeks after signing.
We covered the big picture in our earlier piece on the ten key things to know before you sign an LOI. This one goes clause by clause, because the difference between a good LOI and a bad one often comes down to three or four paragraphs that owners skim past on their way to the price on page one.
What an LOI Is and What It Is Not
A letter of intent is a statement of a buyer’s serious intent to purchase your business on a set of terms, subject to further diligence, financing, and definitive agreements. It is not a purchase agreement. It does not transfer ownership, and in most cases it does not obligate either party to close.
Think of it as the buyer saying: here is what we think this business is worth, here is roughly how we’d structure the deal, and here is what we need from you to confirm it. The definitive purchase agreement that follows, usually 60 to 120 days later, is where the actual legal obligations live. The LOI sets the terrain that agreement gets negotiated on.
That distinction matters because owners sometimes relax once an LOI is signed, treating it as the finish line. It’s the starting gun for diligence, not the close. A buyer can still walk away after signing an LOI, and often does if diligence turns up something they don’t like.
Why a Bare-Bones LOI Should Give You Pause
A thin LOI, one that offers a price, a vague structure, and little else, is often a negotiating tactic dressed up as efficiency. Some buyers prefer to keep the document short precisely because it gets them to exclusivity fast, before the harder questions around working capital mechanics, earn-out terms, or indemnification have ever been discussed. That ambiguity doesn’t disappear once you sign. It resurfaces during diligence, when the buyer has leverage and you don’t, and it’s exactly the setup that leads to re-trading: the buyer discovers the details were never actually agreed and uses that gap to push for a lower price or tougher terms after you’ve stopped talking to anyone else.
The proper purpose of an LOI runs the other direction. It exists to work out the deal’s framework, key terms, and timeline in enough detail that both sides are negotiating from the same understanding, not rebuilding the deal’s structure three weeks before closing. A well-built LOI sustains good faith between buyer and seller because it settles what can be settled early. Exclusivity is a real commitment on your end, and a buyer who won’t get specific about price mechanics, structure, and timeline before asking for it is showing you how they’ll behave once they have it. Use the LOI negotiation itself to sort out buyers who aren’t serious, or aren’t capable of closing, before you take your business off the market for them.
Done well, the LOI also becomes the foundation for the legal drafting that follows. Your lawyers negotiate the purchase agreement’s legal language, but they’re not renegotiating the business deal from scratch, they’re building the necessary legal structure around the business terms you and the buyer already agreed to in the LOI. The more specific the LOI, the less room there is for either side’s counsel to reopen commercial points later under the cover of “standard language.”
Which Provisions Are Binding vs. Non-Binding
This is the single most important thing to understand about any LOI in M&A: it is a mix of binding and non-binding language in the same document, and the two rarely sit next to each other with a helpful label.
Price, structure, and the general terms of the deal are almost always non-binding. Both sides expect them to shift once diligence, financing, and legal drafting get underway. A buyer can revise the offer downward after diligence and still be acting within the LOI’s terms, because the price was never a promise.
A handful of provisions are typically binding regardless of whether the deal ever closes: confidentiality, exclusivity, expense allocation, and governing law. These clauses survive even if the whole transaction falls apart. Read the final section of the LOI closely, since that’s usually where the document states which paragraphs bind and which don’t. If it doesn’t say so explicitly, ask the buyer’s counsel to clarify in writing before you sign.
Exclusivity and No-Shop Clauses
This is where owners give up the most leverage without realizing it. An exclusivity or no-shop clause commits you to stop talking to other buyers for a defined period, usually 60 to 90 days, while this buyer conducts diligence.
Exclusivity is standard and buyers won’t spend real money on diligence without it. The negotiation isn’t over whether to grant exclusivity, it’s over how long and what happens if the buyer misses the deadline. A 90-day exclusivity period with no defined end date, or one that auto-renews if diligence runs long, hands the buyer a free option on your business while you sit on the sidelines.
Push for a fixed exclusivity window tied to specific milestones, such as delivery of a financing commitment or completion of quality-of-earnings review by a certain date. If the buyer needs more time, that’s a conversation, not an automatic extension.
The negotiation isn’t over whether to grant exclusivity, it’s over how long and what happens if the buyer misses the deadline.
Purchase Price Mechanics and Adjustment Language
The headline number in an LOI is a starting point, and the mechanics buried below it determine how much of that number you actually walk away with. Look for three things specifically: a working capital adjustment, an earn-out or holdback, and the treatment of debt-free, cash-free at close.
A working capital adjustment true’s up the price based on the business’s working capital at closing against an agreed target. If the LOI doesn’t specify how that target will be calculated, or whose accountant sets it, you’re negotiating a number now without knowing the formula that will move it later. Get the mechanism defined in the LOI, even in general terms, rather than leaving it entirely to the purchase agreement.
Earn-outs and holdbacks defer a portion of price to a future date or tie it to post-closing performance. These provisions are almost always non-binding in the LOI and get fully documented later, but the LOI should at least state the percentage held back, the metric it’s tied to, and the general timeframe. Vague earn-out language in an LOI is a signal to slow down and ask for specifics before you grant exclusivity.
Representations and Warranties Overview
Most LOIs mention reps and warranties only in passing, since the detailed language comes later in the purchase agreement. What you’re looking for at the LOI stage is the general framework: is the buyer signaling a standard set of seller representations about the business (financials, contracts, litigation, employees, environmental matters), or are they flagging something unusual up front, like an indemnification cap well above market or a long survival period for reps?
Reps and warranties are the mechanism by which risk gets allocated between buyer and seller after closing. If something goes wrong post-sale, whether the buyer discovers undisclosed liabilities or a customer contract that doesn’t transfer as expected, the reps and warranties (and the indemnification terms tied to them) determine who pays. Talk to your lawyer about what’s market for your deal size and sector before the purchase agreement stage, so you’re not learning the going rate for indemnification caps and escrow periods for the first time when the draft lands on your desk.
This piece isn’t legal advice, and nothing in an LOI should be finalized without your own counsel reviewing it. What we can tell you from sitting across the table on these deals repeatedly is where the friction points usually show up, and reps and warranties language is one of them.
Five Questions to Ask Before Signing
Before you sign, run the LOI past these five questions:
1. Which clauses are binding, and does the document say so explicitly? If it’s ambiguous, get clarification in writing.
2. How long is exclusivity, and is it tied to milestones or just a calendar date? An open-ended clock favors the buyer.
3. Is the working capital target and adjustment mechanism defined, even loosely, or left entirely to negotiation later?
4. If there’s an earn-out or holdback, does the LOI specify the percentage, the metric, and the timeframe, or is it a single vague sentence?
5. What happens if the buyer walks away during exclusivity? Are your expenses covered, and are you free to resume talking to other buyers immediately?
An LOI that answers these five questions clearly is a sign of a buyer who has done this before and is negotiating in good faith. One that’s vague on all five isn’t necessarily a bad buyer, but it’s a signal to slow down and get specifics before you give up your exclusivity and your leverage in the same signature.
If you are thinking about a sale and want to talk through what this means for your business, we are happy to have that conversation. Book a confidential strategy call with our partners.