The letter of intent (LOI) is one of the most consequential documents in a business sale, and one of the most commonly underestimated. From the outside, it looks like a preliminary handshake: a few pages, mostly non-binding, signed before the real work begins. In practice, the terms set in the LOI anchor the entire transaction. Once a price, structure, and exclusivity period are written down, walking them back during definitive-agreement negotiation is difficult and often costly.
For owners preparing to sell a business, the LOI is a stage where careful advisor coordination matters more than the document's preliminary appearance suggests. This article is an educational overview of the topics worth raising with your transaction counsel, tax advisors, and financial advisors before signing. It does not provide legal, tax, accounting, or financial advice; every decision discussed here should be reviewed with appropriately licensed professionals familiar with your specific deal.
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Why the LOI matters more than its non-binding sections suggest
Most LOIs have a small set of provisions that are explicitly binding (typically confidentiality, exclusivity, and expense allocation) and a larger set that are explicitly non-binding (price, structure, conditions, deal terms). The non-binding label is technically accurate and practically misleading.
The non-binding terms in the LOI become the negotiating baseline. The buyer's counsel drafts the definitive agreement starting from those terms. Anything the seller wants to change requires re-opening a topic the parties have already agreed on at a high level. The cost of re-opening is friction, time, and the small but real risk that the deal stalls.
Owners often sign an LOI under the impression that the real negotiation happens later. The real negotiation happens at the LOI. The definitive-agreement stage is the implementation, and implementation usually follows the LOI's structure more closely than sellers expect.
Topics to clarify with your transaction counsel before signing
The transaction lawyer's role at the LOI stage is broader than reviewing the document. The questions worth raising with them in advance:
What is binding and what is not? The LOI's binding sections (confidentiality, exclusivity, expense allocation, sometimes governing law and dispute resolution) are the ones that take effect immediately upon signature. Confirming exactly which sections are binding, and what each one obligates the seller to, is the starting point.
What is the exclusivity period? Most LOIs include a "no-shop" provision binding the seller to negotiate exclusively with the buyer for a defined window, often 60 to 120 days. During that window, the seller cannot solicit or accept competing offers. The length of the window, what counts as a permissible exception (responding to an unsolicited offer, ongoing relationships), and the consequences of a breach are all worth clarifying.
What price structure is the LOI fixing? A purchase price stated as an enterprise value is different from a stated equity value, and both are different from a stated value with adjustments for working capital, debt, and cash. The LOI's price language is the anchor for every subsequent negotiation; the time to clarify the exact definition is before signing.
What conditions to closing does the LOI contemplate? A buyer-friendly LOI will reference broad due diligence rights, financing contingencies, and material adverse change clauses. Each of these gives the buyer an exit lane. Topics to discuss with counsel: how broadly each is defined, what triggers each one, and whether the seller's exposure during the exclusivity period is acceptable.
What is the treatment of representations, warranties, and indemnification? The LOI may sketch the structure (caps, baskets, survival periods) at a high level. If it does, those numbers become the negotiating baseline.
What about transaction expenses? Some LOIs allocate transaction expenses by category; others leave them ambiguous. Clarifying who pays for what (legal fees, accounting work, advisor fees) before signing avoids disputes mid-process.
The American Bar Association's Business Law Section publishes accessible educational material on private M&A practice that owners can review before the conversation with counsel.
Topics to clarify with your tax advisor before signing
The tax advisor's role at the LOI stage is to flag any structural decisions in the LOI that constrain tax planning. Key topics:
Is the contemplated structure an asset sale or a stock sale? The LOI usually specifies which one. The tax treatment of each is substantially different for both seller and buyer, and the choice affects the after-tax proceeds materially. If the LOI commits to a structure that is sub-optimal for the seller's tax situation, raising it at the LOI stage is much easier than at definitive agreement.
How is the purchase price allocated across asset categories? In an asset sale, the buyer and seller allocate the purchase price across categories of assets (inventory, equipment, real property, goodwill, intangibles). The allocation has different tax consequences for each side. The LOI may or may not commit to an allocation methodology; the tax advisor's view on what the LOI should and should not include is worth getting before signing.
Are there contingent payments (earnouts, escrows, holdbacks) and how will they be taxed? Each of these payment structures has its own timing rules for when the seller recognizes income. An earnout taxed across multiple years is different from a holdback taxed at closing. The Internal Revenue Service guidance on installment sales is a starting reference, though the specific treatment depends on the transaction's structure.
Does the LOI affect the seller's ability to use Section 1202 (Qualified Small Business Stock) benefits? For sellers holding qualified stock, the structure committed to in the LOI can determine whether the gain qualifies for the Section 1202 exclusion. This is a topic where the LOI stage is the right time to raise it; renegotiating later is harder.
State and local tax implications. The LOI's structural decisions affect state-level tax exposure as well as federal. Multi-state operations add complexity that the tax advisor can flag in advance.
Topics to clarify with your financial advisor before signing
The financial advisor's role at the LOI stage is to think about the after-close picture. Topics:
What is the projected after-tax, after-expense net proceeds? The LOI's purchase price is the gross figure. After taxes, transaction expenses, advisor fees, broker fees, and any escrow or holdback that the seller does not have access to at closing, the figure available for reinvestment is meaningfully smaller. Knowing the net before signing changes how the deal looks.
Are there liquidity needs in the months around closing? The seller may need to cover transaction expenses, advisor fees, or personal obligations between LOI signing and the closing date. Clarifying the cash flow expectation during the exclusivity period avoids surprises.
How does the deal structure align with reinvestment plans? A seller planning to roll proceeds into a specific reinvestment strategy may benefit from particular structural choices in the LOI. The financial advisor can flag where the LOI's structure helps or constrains the reinvestment options.
What is the timeline for the financial advisor's own work during diligence and closing? Coordinating the financial advisor with counsel and the tax team during the exclusivity period reduces the risk of one workstream blocking another at the wrong moment.
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The role of advisor coordination at the LOI stage
The recurring theme across the above topics is that the LOI is where advisor coordination matters most. The lawyer is focused on the legal structure, the tax advisor on the tax consequences, the financial advisor on the after-close picture. Each is looking at the same document through a different lens. The LOI's terms touch all three lenses simultaneously.
Owners who sign LOIs without coordinating across the three often find that the structural choices have downstream consequences the individual advisors did not flag because each was looking at their own slice. Coordinating early, before signing, is the pattern that reduces this risk.
A free educational resource like Capivise is one place where owners exploring an exit can review the kinds of topics each advisor specialty typically covers, before committing to a specific engagement. The site is educational; the actual engagement with each advisor is where the specific deal review happens.
Common LOI provisions that warrant a second look
A few specific provisions that show up in most LOIs and that owners often agree to without fully clarifying the implications:
Material adverse change clauses. The LOI may give the buyer the right to walk if a "material adverse change" occurs between LOI signing and closing. The definition of material adverse change is highly negotiated in definitive agreements; in the LOI, even a sketched version becomes the starting point. Counsel can flag whether the LOI's MAC language is buyer-friendly, seller-friendly, or neutral.
Diligence access and timeline. The LOI typically grants the buyer broad diligence rights for a defined period. The scope of access (financial records, customer contracts, employee files, IT systems) and the timeline are worth clarifying. A very broad diligence right combined with a long exclusivity window puts the seller at a disadvantage if the deal does not close.
Conditions to definitive agreement. Some LOIs include a list of conditions the buyer must be satisfied with before signing the definitive agreement. The list is itself a negotiating point. Owners can ask counsel whether each condition is standard, buyer-friendly, or unusual.
Treatment of management and employees. The LOI may reference rollover equity for management, retention plans for key employees, or non-compete obligations. Each is consequential and worth coordinating across counsel and (where applicable) the financial advisor for the affected individuals.
Treatment of existing advisor relationships. Some LOIs require the seller to terminate existing advisor relationships (broker, investment banker) before closing. The terms of any such termination are worth clarifying upfront.
Questions worth asking before the LOI is even drafted
Before the LOI is drafted, a small set of questions worth raising with the advisor team:
- What is the seller's bottom-line price after taxes and transaction expenses? Without this number, evaluating any LOI price is guesswork.
- What deal structure (asset vs stock, earnout vs no earnout, escrow vs no escrow) best fits the seller's tax and liquidity situation?
- What is the seller's tolerance for an exclusivity period, and what would trigger walking from the LOI?
- What conditions to closing are acceptable, and which would be deal-breakers?
- How will diligence be managed (data room setup, contact responsibility, timeline)?
- What is the seller's plan if the deal does not close after the exclusivity period (return to market, restructure, hold)?
These questions are easier to answer before there is a specific LOI on the table. Once a buyer's draft is in hand, the seller's team is reacting to it rather than setting expectations.
Educational resources to review
A few publicly available educational resources worth reviewing alongside conversations with counsel and advisors:
- The American Bar Association's Business Law Section publishes accessible material on private M&A practice.
- The SEC investor education hub covers basics of securities transactions and offerings.
- The Federal Reserve Bank of St. Louis economic research portal provides macroeconomic context that affects deal valuations and timing.
- The Capivise homepage is one place to review the categories of advisor specialty involved in a business sale and the questions typically raised in each.
These resources are educational. They do not replace conversations with licensed counsel, a qualified tax advisor, or a financial professional.
The role of the LOI in the broader exit timeline
The LOI is one of several documents in the broader exit timeline (engagement letter with an investment banker, confidentiality agreements with potential buyers, the LOI itself, definitive agreement, closing documents). Each one sets up the next, and decisions made early constrain decisions made later.
The pattern that consistently works for owners: treat the LOI as the first real negotiation, not the preliminary handshake. The terms set in the LOI propagate forward; the topics not raised at the LOI stage are harder to introduce later. Coordinating counsel, tax, and financial advisors before signing, and asking each one the right questions for their specialty, is the discipline that produces an LOI that holds up through definitive agreement and closing.
For broader context on coordinating advisors across an exit, the Capivise advisor matching platform is one educational resource owners can review when thinking through which advisor specialties their specific situation requires.
