Key Negotiation Points for a Letter of Intent (LOI)

The Letter of Intent (LOI) is the first serious document in an acquisition and a critical opportunity for a founder to set favorable terms. While non-binding, it frames the entire negotiation, and power shifts to the buyer after it's signed. It is crucial to negotiate key points before entering the exclusivity period.

1. Preparation is Leverage

Get Your House in Order: Complete as much pre-sale due diligence as possible before signing the LOI. This uncovers potential issues early and prevents the buyer from using them as leverage to lower the price later.
Lawyer Up: Hire an experienced M&A lawyer immediately. The buyer will have a team of experts; you need one too. This is not a place to be frugal.

2. Timeline and Exclusivity

Negotiate the Timeline: Don't let the buyer rush you. Set a reasonable timeline for due diligence and closing.
Shorten the Exclusivity Period: The "no-shop" or exclusivity period is when you cannot talk to other buyers. Push for the shortest possible period (e.g., 30 days or less) to maintain your leverage and create a sense of urgency for the buyer.

3. Purchase Price and Payment

Define the Price: Negotiate a final, unconditional purchase price. Avoid ambiguity or conditions tied to financing.
Cash is King: An all-cash settlement is the cleanest and least risky option.
Structure Earnouts Carefully: If an earnout (future payments based on performance) is necessary to bridge a valuation gap, it should be tied to top-line revenue, not profit. Post-acquisition profits are outside of your control and will likely decrease during the transition.

4. Reps and Warranties

Minimize Your Exposure: Representations and warranties are your legal assertions about the state of the business. A breach can lead to you having to pay back a portion of the purchase price.
Cap the Liability: Negotiate to limit your liability to a small percentage of the purchase price (e.g., 10% or less) and for a limited time period (e.g., 12 months).

5. Working Capital

Define it Clearly: Negotiate the definition of working capital and the amount you are expected to leave in the business at closing. Most deals are "cash-free, debt-free," but the specifics of what this means must be clearly defined to avoid disputes.

Negotiating the LOI is a critical sparring match. Standing your ground on these key points sets the stage for a successful closing on your terms.