Letters of Intent in Private Company Sales: Key Terms to Negotiate

The letter of intent is where a seller’s leverage is converted into deal terms. Price matters, but so do the definitions, payment mix, working capital mechanism, financing condition and exclusivity period. Once the LOI is signed, the buyer is often the only party at the table and every unresolved issue becomes harder to negotiate.

Owners should therefore treat the LOI as the most important economic negotiation before the purchase agreement. It is not a short administrative step between an offer and closing. It is the point where two apparently equal bids can become very different outcomes. KitsWest’s guide to selling a business in BC places the LOI inside the full sale process.

An LOI sets the transaction’s economic framework

A letter of intent records the principal terms on which buyer and seller intend to proceed. The document usually addresses purchase price, transaction form, consideration, cash and debt treatment, working capital, diligence, financing, exclusivity, employee matters, restrictive covenants and expected timing.

The definitive agreement will add legal detail, representations, remedies and closing mechanics. It should not be the first time the parties discuss a material economic term. Leaving a point open does not preserve flexibility equally. After exclusivity begins, ambiguity usually favours the buyer.

Binding provisions deserve separate attention

Most LOIs state that price and structural terms are non-binding, while confidentiality, exclusivity, expenses, access and governing-law provisions are binding. The exact drafting controls. A seller can be legally prohibited from speaking with other buyers even though the buyer is not legally required to close.

Legal counsel should review the document before signature. The financial advisor should confirm that the language matches the commercial agreement. A term that sounds clear in conversation can operate differently once definitions, conditions and exceptions are added.

Enterprise value is not the seller’s cheque

Private-company offers are often expressed as enterprise value on a cash-free, debt-free basis with a normalized level of working capital. Equity value is calculated only after cash, debt, debt-like items and the closing working-capital adjustment are applied.

The LOI should define the framework rather than defer every item. Unpaid bonuses, transaction costs, shareholder loans, leases and deferred revenue can move between debt, working capital and ordinary liabilities depending on the agreement. Our article on working capital adjustments explains one of the largest sources of post-LOI movement.

A worked comparison of two equal headline offers

Assume two buyers each offer $8.0 million of enterprise value. Buyer A proposes $7.4 million of cash at closing and a $600,000 holdback. Buyer B proposes $6.8 million of cash, a $700,000 vendor note and a $500,000 earnout. Both offers show the same headline value.

Now assume both buyers deduct $900,000 of debt and debt-like items. Buyer A also proposes a $250,000 working-capital shortfall, producing $5.65 million of cash at closing before the holdback. Buyer B accepts the working-capital delivery but pays only $5.9 million of cash at closing, with $1.2 million exposed to credit and performance risk. The better offer depends on holdback terms, note security, earnout probability and seller objectives. Headline enterprise value alone does not answer the question.

Consideration should be valued by risk and timing

Cash at closing, a vendor take-back note, an earnout, escrow and rollover equity are not interchangeable. Each component has a different probability, payment date, tax treatment and level of seller control.

The LOI should state principal amounts, broad payment mechanics and key protections. A seller who accepts contingent or deferred price should know what could stop payment and who controls that outcome. Use the business sale proceeds calculator as an initial modelling tool, then build a transaction-specific waterfall.

Exclusivity should be short, conditional and earned

Exclusivity prevents the seller from soliciting or negotiating with alternatives. It gives the buyer time to conduct diligence and arrange financing. It also removes the competitive pressure that established the seller’s leverage.

The period should reflect the work remaining and include milestones. Examples include delivery of a diligence request list, management meetings, financing evidence, a first purchase-agreement draft and a target signing date. Automatic extensions should be avoided unless the buyer is meeting defined obligations. An open-ended no-shop rewards delay.

Financing conditions must be specific

A financing condition can allow a buyer to exit if debt is unavailable. The seller should understand whether the buyer has lender support, what portion of the price requires financing and what efforts the buyer must make. A broad condition with no standard gives the buyer a low-cost option on the company.

Buyers need room to complete credit approval, but they should enter the LOI with a credible capital plan. Our guide to acquisition financing explains why lender discussions should begin before exclusivity.

Diligence conditions should not rewrite the price

Diligence confirms the assumptions underlying the offer. It should not become a second auction where the buyer controls all the information and no competing bidder remains. The LOI should identify major assumptions and distinguish a genuine adverse finding from an item already disclosed.

Seller preparation matters. Clean reconciliations, documented add-backs, contract schedules and a responsive data room reduce the buyer’s ability to claim uncertainty. A quality of earnings review may be useful when adjusted EBITDA is central to value.

Post-closing obligations affect the seller’s real exit

The LOI may address transition services, continued employment, consulting, non-competition, non-solicitation, employee retention and treatment of management incentives. These terms can determine whether the seller leaves at closing or remains economically and operationally tied to the company.

Compensation for post-closing work should be separated from purchase price. Restrictive covenants should match the transaction’s legitimate needs, industry and geography. Employment and tax advice should be obtained before language is accepted.

Holdbacks and indemnity concepts change proceeds

LOIs increasingly outline escrows, holdbacks, indemnity caps, baskets, survival periods and representation-and-warranty insurance. Even a preliminary framework can affect the amount available at closing and the seller’s exposure after closing.

The seller should model the maximum cash unavailable at closing, release dates and claims process. Our article on asset versus share sales provides additional context for transaction structure, while legal counsel should lead the drafting of risk allocation.

The LOI should also identify key approvals. Landlords, customers, regulators and change-of-control counterparties can influence timing and certainty. If a critical contract requires consent, the parties should decide when the counterparty is approached, who controls the message and what happens if consent is delayed. Confidentiality can be lost if outreach begins too early.

Tax structure should not be left to the final week. An asset sale, share sale, rollover or pre-closing reorganization can change proceeds and execution risk. The LOI does not need to contain a complete tax plan, but it should preserve enough flexibility for advisors to implement the agreed economics without reopening price.

Seller financing certainty also matters. If the buyer depends on debt, equity partners or investment-committee approval, the seller should request evidence appropriate to the stage. A signed term sheet is stronger than a general statement of lender interest, but it still contains conditions. The transaction timetable should reflect what remains unresolved.

A competitive process creates the strongest LOI when bidders receive consistent information and submit offers against the same instructions. The seller can then compare price, structure, conditions and timing on one basis. In a bilateral negotiation, the advisor must create discipline without relying on another visible bidder. The seller should be prepared to pause rather than accept a document that shifts every unresolved risk to closing.

The final review should convert the LOI into a one-page proceeds and risk summary. Show cash at closing, deferred amounts, contingent amounts, debt and working-capital adjustments, holdbacks, required seller work, exclusivity dates and open conditions. If an owner cannot clearly explain the transaction from that summary, the document is not ready to sign.

The summary should also identify who bears each unresolved risk. If inventory value changes, who absorbs it? If financing costs rise, can the buyer reduce price? If a key consent is delayed, does exclusivity extend? If a customer leaves before closing, what adjustment applies? Naming the risk owner exposes vague drafting before it becomes a costly dispute after exclusivity.

Sellers should resist artificial urgency. A buyer may present an expiry date to create momentum, but a serious counterparty can usually accommodate the time needed for professional review. Signing quickly rarely creates goodwill that survives a later disagreement over money. A disciplined review protects both parties by ensuring the document records the transaction they actually intend, with no material term or closing condition left to assumption.

Frequently asked questions

Is a letter of intent legally binding?
Some provisions usually are and others usually are not. The wording controls, so legal counsel should identify each binding obligation before signature.

Should working capital be negotiated in the LOI?
Yes. The LOI should establish the target methodology, important inclusions and exclusions, and the adjustment framework before leverage shifts to the buyer.

How long should exclusivity last?
The period should match the remaining diligence, financing and documentation work. Shorter periods with objective milestones protect the seller better than a long automatic no-shop.

Can the purchase price change after the LOI?
Yes. Diligence findings, working capital, debt-like items and purchase-agreement negotiations can change proceeds. A detailed LOI reduces avoidable repricing.

Who should review the LOI?
The seller’s M&A advisor, transaction lawyer and tax advisor should review the economics, legal obligations and after-tax structure before signing.

Next steps

KitsWest Capital helps business owners compare offers, model net proceeds and negotiate the LOI while competitive leverage still exists. Our business sales advisory continues through diligence, documentation and closing.

If you have received an LOI or an unsolicited offer, contact KitsWest Capital before signing exclusivity.