The letter of intent looks informal — a few pages, mostly non-binding, signed before the lawyers get expensive. That appearance misleads sellers into treating it casually, and it is the costliest mistake in selling a business. The moment you sign an LOI with exclusivity, your negotiating leverage transfers to the buyer: other bidders leave, diligence finds its inevitable issues, and every open term gets resolved in the buyer's favor. The rule is simple — anything important should be in the LOI.
What an LOI is, legally
A typical LOI states the key deal terms as non-binding expressions of intent, while making a short list of provisions expressly binding: exclusivity, confidentiality, expense allocation, governing law, and sometimes a break-up arrangement. Drafting discipline matters, because a sloppy LOI can be construed as a binding contract to sell — or at least a binding obligation to negotiate in good faith — with damages attached. Say expressly which provisions bind, state that no obligation to consummate arises unless a final purchase agreement is signed, and behave consistently with that language afterward.
Price is not a number — it is a mechanism
"$10 million" means little until you know what surrounds it. The LOI should pin down:
- Enterprise vs. equity value, and that the deal is cash-free, debt-free if that is the intent — with "debt" defined broadly enough to surface disputes now (capital leases? deferred revenue? accrued bonuses?);
- Working capital: the price assumes a normal level of working capital delivered at closing, and the LOI should at least fix the methodology for setting the peg, since this adjustment routinely moves six figures;
- Form of consideration: cash at closing versus seller notes, rollover equity, or an earnout — with any earnout's metric, period, cap, and key protections sketched in the LOI, not deferred;
- Structure: asset or equity purchase, and any tax elections, because structure reprices the deal after tax and is brutal to renegotiate later.
Lock the risk-allocation economics
Sellers reflexively defer indemnification "for the lawyers," which means deferring it to the moment they have no leverage. The LOI should set the economic skeleton: the escrow or holdback amount and duration, the indemnity cap (in a competitive process, often the escrow itself outside of fundamentals and fraud), the deductible or basket, and survival periods for representations. If the deal will use representation-and-warranty insurance, say so and allocate the premium and retention now. None of this requires long drafting — a few sentences each — but those sentences are worth more than weeks of purchase-agreement negotiation later.
Exclusivity: the one thing the buyer truly wants
Exclusivity — your binding promise not to shop the deal — is the buyer's core ask and your main bargaining chip. Trade it deliberately:
- Keep it short: 30 to 60 days, extendable only in writing, ideally only if the buyer is proceeding diligently;
- Get commitment signals in exchange: a diligence request list and timeline, evidence of financing, and drafting responsibility with target dates;
- Let it die on inactivity: exclusivity should lapse if the buyer stops working or tries to retrade price without a diligence basis.
Confidentiality should be mutual and durable, and if employees do not yet know about the sale process, address announcement timing expressly.
The seller's personal terms
The LOI is also the right moment to fix the terms that affect you rather than the company: your post-closing role, title, compensation, and time commitment; the treatment of your equity rollover, if any, including governance and liquidity rights in the buyer's entity; and the scope of your non-compete. California voids most employee non-competes, but covenants given by a selling owner in connection with the sale of a business are enforceable within statutory limits (Bus. & Prof. Code § 16601) — so negotiate the duration, territory, and scope now, while the buyer still needs your signature. Founders who leave these "details" for later routinely discover them attached to the purchase agreement as take-it-or-leave-it exhibits.
Process from LOI to closing
A well-built LOI compresses everything that follows: diligence proceeds against a known risk allocation, the purchase agreement drafts from an agreed skeleton, and retrading attempts are measurable against a written baseline. Before you sign, have M&A counsel review the draft — buyers' forms are built from experience, and matching that experience at the LOI stage may cost a fraction of the expense it can save. Sellers who have already organized their records and diligence materials move even faster; see the firm's contracts work for the cleanup that usually precedes a sale.
Talk to a California business attorney
If you have received a letter of intent — or expect one — a review before signature is the highest-leverage hour in the entire sale process. Schedule a free consultation or call (949) 418-2113.
This article is attorney advertising and provides general information only. It is not legal advice and does not create an attorney–client relationship. Facts matter; consult a lawyer about your specific situation.
