Letters of Intent in Private Company Sales: Key Terms to Negotiate
The letter of intent (LOI) is the document where most of the leverage in a private company sale is decided. It is often viewed as a preliminary, non-binding document, and parts of it are. But the LOI typically sets the price, the structure, the exclusivity period, and the framework for everything that follows.
Once the LOI is signed, the seller’s negotiating leverage drops sharply. The buyer is now the only buyer in the room, the diligence clock starts, and changing course becomes harder with every passing day. Owners who treat the LOI as a formality often regret it weeks later.
What a Letter of Intent Does
A letter of intent is a written summary of the principal terms on which the parties agree to proceed. It is the bridge between informal negotiations and the definitive purchase agreement.
A typical LOI covers:
• purchase price and form of consideration
• treatment of debt, cash, and working capital
• exclusivity period and process commitments
• conditions to closing
• key business terms such as non-competes and employment matters
• confidentiality and expense responsibilities
The document is often 5 to 15 pages. It is not the contract that closes the deal, but it is the document that shapes it.
Binding and Non-Binding Provisions
Most LOIs are mixed documents. The economic and structural terms are typically non-binding, intended as a framework for negotiation. Certain provisions are usually binding.
Commonly binding provisions include:
• exclusivity (no-shop)
• confidentiality
• expense allocation
• governing law and dispute resolution
Owners should be clear which provisions bind them and which do not. A surprising number of disputes arise because one party assumed something was binding that the document did not actually require.
The Purchase Price and How It Is Expressed
Price in an LOI is rarely a single number. It is usually expressed as enterprise value with adjustments for cash, debt, and working capital.
Owners should understand:
• what enterprise value the buyer is offering
• how that translates to equity value after adjustments
• what items will be classified as debt or debt-like
• how working capital will be measured
Two LOIs with the same headline enterprise value can produce materially different proceeds to the seller depending on these mechanics.
Form of Consideration
Consideration can include:
• cash at closing
• rolled equity in the acquiring entity
• vendor take-back notes
• earnouts
• escrowed amounts
The mix matters. Cash at closing is the most valuable to the seller. Rolled equity and earnouts carry future risk. Vendor take-backs carry credit risk and timing risk.
Sellers should consider not only the gross headline number but the time-adjusted, risk-adjusted value of each component. A higher headline price with a smaller cash component and a larger vendor take-back is not always a better outcome than a lower headline price with full cash at closing.
Working Capital and Closing Adjustments
The LOI should address how working capital will be treated, not just that it will be. The methodology, the period used for the target, the items included and excluded, and the dispute resolution mechanism are all easier to negotiate before exclusivity begins.
Sellers who defer this to the purchase agreement often find that the same buyer who was flexible at the LOI stage becomes firm once the seller has no alternatives.
Exclusivity (No-Shop) Provisions
Exclusivity is the buyer’s protection. It prevents the seller from continuing to talk to other buyers during the agreed period.
Key points to negotiate include:
• the length of the exclusivity period (often 30 to 90 days)
• whether the period can be extended automatically or only by mutual agreement
• the scope of activities prohibited during the period
• exceptions for ongoing fiduciary obligations
• the consequences if the buyer fails to act in good faith
A long exclusivity period without milestones is one of the most common mistakes in private company LOIs. Owners should push for shorter periods and clear progress requirements.
Conditions to Closing
Conditions to closing are events or approvals that must occur before the deal completes. Common conditions include:
• completion of diligence to the buyer’s reasonable satisfaction
• regulatory approvals
• lender financing on agreed terms
• continued performance of the business
• execution of key employment or non-compete agreements
Broad, vague conditions favour the buyer. Specific, objective conditions favour the seller. The LOI sets the tone for how these are eventually drafted in the purchase agreement.
Representations, Warranties, and Indemnification
The LOI usually outlines the framework for the seller’s representations and indemnification, even if the detail is left to the definitive agreement.
Points often addressed include:
• the survival period for representations
• caps on indemnification
• baskets and deductibles
• treatment of fundamental representations
• whether representation and warranty insurance will be used
These provisions can affect the seller’s exposure for years after closing. Pushing back at the LOI stage is far easier than trying to renegotiate them in the purchase agreement.
Escrow and Holdback Arrangements
Many deals include a portion of the purchase price held in escrow to support indemnification obligations.
Common terms include:
• an escrow amount of 5 to 15 percent of the purchase price
• a release period of 12 to 24 months
• separate, smaller escrows for working capital or specific items
Where representation and warranty insurance is used, escrow amounts are often smaller. The LOI should make the framework clear so the seller can model net proceeds accurately.
Treatment of Employees, Management, and Non-Competes
LOIs often address:
• whether key employees will be offered employment with the buyer
• whether the seller will sign a non-compete and for how long
• the scope and geography of any non-compete
• any retention or transition arrangements for management
Non-compete terms can have a meaningful impact on the seller’s future options. Broad, long, or vague non-competes should be addressed early, not after the purchase agreement is drafted.
Timeline and Diligence Process
A well-drafted LOI includes a timeline. Typical components are:
• the period for due diligence
• target signing date for the definitive agreement
• expected closing date
• milestones during the process
Without a clear timeline, the process can drift, which usually favours the buyer.
Why the LOI Is the Critical Document
Owners often assume that the real negotiation happens in the definitive agreement. In practice, the LOI typically sets the terms that become hardest to change later. After exclusivity begins, the buyer knows the seller has limited alternatives. That awareness shapes how subsequent negotiations unfold.
Whatever has not been negotiated in the LOI generally favours the party with more leverage during diligence. That party is usually the buyer.
How KitsWest Capital Helps
KitsWest Capital advises owners through the LOI negotiation phase of a sale as a focal point of the entire process. Our role typically includes preparing the seller’s positions on each key term, coordinating with legal counsel, modeling net proceeds across scenarios, and ensuring that the LOI fairly reflects the competitive dynamics established earlier in the process.
Where the LOI is the result of a competitive process, our work focuses on maximizing the leverage that competition creates. Where the LOI emerges from a bilateral negotiation, our work focuses on ensuring the seller does not concede ground that should have been preserved.
Final Thoughts
The LOI is not the end of the negotiation. It is the moment when the negotiation matters most. After exclusivity begins, the seller will spend months responding to diligence with limited ability to shift major terms.
For owners contemplating a sale, the message is simple: take the LOI seriously, take advice on it, and resist the pressure to sign before key terms are clear. The hours spent on the LOI usually pay back many times over in the final outcome.
Speak with an Advisor
If you are evaluating a business sale, acquisition, unsolicited offer, or valuation matter, KitsWest Capital welcomes confidential discussions.
