LOI Negotiation Guide
Key terms to negotiate in a Letter of Intent and strategies for both buyers and sellers. Understanding LOI dynamics helps set the stage for a successful transaction.
A Letter of Intent (LOI) is a document outlining the key terms of a proposed acquisition. While most provisions are non-binding, the LOI sets expectations and creates momentum toward closing. Negotiating the right terms at the LOI stage makes the definitive agreement process smoother.
This guide covers the most important terms to negotiate, with perspectives for both buyers and sellers.
Key Terms to Negotiate
Purchase Price
The total consideration to be paid for the business. May be expressed as a range or specific number.
Seller Strategy
Push for specificity and minimize price adjustments. Consider whether the headline price reflects true value after all adjustments.
Buyer Strategy
Maintain flexibility through ranges and adjustment mechanisms. Tie portions to performance or validation of assumptions.
Deal Structure
Whether the transaction is an asset purchase or stock/equity purchase. Affects tax treatment and liability transfer.
Seller Strategy
Stock sales are generally more tax-efficient for sellers. Push for stock unless there are compelling reasons otherwise.
Buyer Strategy
Asset purchases provide more flexibility and limit liability assumption. Consider tax implications and negotiate accordingly.
Earnout
Contingent consideration tied to future performance. Bridges valuation gaps between buyer and seller.
Seller Strategy
Negotiate clear, measurable metrics. Ensure you have control over factors affecting earnout achievement.
Buyer Strategy
Tie earnouts to metrics you can verify. Build in protections against manipulation and ensure reasonable targets.
Working Capital
The amount of current assets minus current liabilities to be delivered at closing.
Seller Strategy
Negotiate a target based on normalized, seasonal working capital. Avoid aggressive definitions that inflate the target.
Buyer Strategy
Define working capital clearly and establish a collar for adjustments. Review historical patterns carefully.
Exclusivity Period
The period during which the seller agrees not to negotiate with other potential buyers.
Seller Strategy
Limit exclusivity duration (45-60 days typical). Include milestones and termination triggers.
Buyer Strategy
Request sufficient time to complete diligence. Include automatic extensions for seller delays.
Due Diligence Scope
The areas and depth of investigation the buyer will conduct before closing.
Seller Strategy
Understand what will be requested and prepare in advance. Limit scope creep through clear boundaries.
Buyer Strategy
Reserve broad rights to investigate. Don't accept limitations that could leave blind spots.
Key Employee Retention
Terms for retaining critical employees post-close, including employment agreements and incentives.
Seller Strategy
Negotiate fair treatment for key employees early. Avoid surprises that could derail the deal.
Buyer Strategy
Identify key personnel and negotiate retention terms upfront. Plan for transition and knowledge transfer.
Representations & Warranties
Statements of fact about the business that the seller will make in the definitive agreement.
Seller Strategy
Push to negotiate rep scope in the definitive agreement, not the LOI. Resist overly broad commitments.
Buyer Strategy
Establish expectations for comprehensive reps. Note any areas requiring specific attention.
General Negotiation Tips
- Know your priorities: Not every term is equally important. Focus negotiating energy on what matters most.
- Understand the other side: Knowing what the counterparty cares about helps find creative solutions.
- Document everything: Verbal agreements should be memorialized in writing promptly.
- Keep momentum: Delays and renegotiation erode trust. Move decisively once terms are agreed.
- Involve advisors early: Experienced M&A attorneys and advisors add value at the LOI stage.
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