A letter of intent sets the principal terms of a proposed deal and starts due diligence under exclusivity. The period between LOI and closing is where the working capital peg, indemnification terms, earnout definitions, and diligence findings move the real value. Deals are lost late through surprises in diligence, an under-negotiated peg, and exclusivity granted without a timeline.
What the LOI should say
Price and how it is paid, structure (asset or equity), the working capital concept, treatment of debt and cash, earnout or seller-note terms if any, exclusivity period, timeline to definitive agreement, key conditions, and what happens if the buyer walks.
An LOI that only states a price has given away everything else. Every term left to the purchase agreement will be negotiated from a weaker position, because by then the seller has stopped talking to other buyers.
Grant exclusivity deliberately
Exclusivity is the seller's advantage, handed to one buyer for a defined period. Keep it short, tie it to milestones, and let it lapse if the buyer misses them. Granting open-ended exclusivity is how a deal drags for a year and dies.
Diligence is a test you can study for
Financial, legal, tax, commercial, operational, technical and regulatory diligence follow known lists. Every finding a buyer discovers is a re-trade opportunity; every finding the seller disclosed first is context. Exit planning is the process of finding them first.
The working capital peg
The peg is the agreed level of working capital the business must deliver at closing. Set too high, the seller leaves cash in the business; set carelessly, the post-closing adjustment becomes a second negotiation. It is the most under-negotiated number in most deals.
The purchase agreement
Your counsel negotiates representations and warranties, indemnification with baskets and caps, escrow, non-compete and transition terms. The advisor keeps the commercial terms aligned with the LOI and keeps the process moving while the lawyers work.
