Deals move fast. You've found — or been approached by — a buyer or seller for a business, the conversation is going well, and suddenly there's a Letter of Intent (LOI) sitting in your inbox. It looks friendly on the surface. But buried in the language are the terms that will shape the entire transaction: price, structure, risk allocation, and your walk-away rights.

This is where most non-lawyers get outmaneuvered — usually because it's not always obvious which clauses protect the buyer, which protect the seller, and which side is quietly giving something up. That's what this one is really about: not just what each term means, but who it actually favors.

What is an LOI (or term sheet), really?

A Letter of Intent or Term Sheet is a mostly non-binding outline of a proposed transaction. It's the bridge between initial interest and a full Purchase Agreement — the document that sets the headline economics and key protections for both sides before anyone spends serious money on lawyers, due diligence, or exclusivity.

Critical reality check — Both Sides

Even though most of the LOI is non-binding, a handful of provisions usually are generally binding, whether you meant to agree to them or not:

Exclusivity / no-shop (typically 30–90 days), confidentiality, expense reimbursement, and governing law / dispute resolution.

Once signed, as the Seller, you're often locked in long enough for the other side to dig through your books — and to walk away or renegotiate if they find something they don't like.

The core sections — and who they actually favor

Purchase price & structure — Both Sides

The headline number is usually framed as "approximately $X million" in enterprise value or total transaction value. Consideration can be cash, equity, seller notes, earn-outs, or some mix. Most LOI's also include a working capital adjustment — where the parties true up the price based on net working capital at closing versus an agreed target. The target is typically negotiated between the signing of the LOI and the closing of the transaction, and can be a material business negotiation among the parties.

Seller watch-out Enterprise value and the actual cash that lands in your account can differ significantly once debt, cash, expenses, and adjustments are netted out. Always run your own model — don't take the headline number at face value.

Earn-outs / contingent consideration — Seller-Weighted Risk

Common when future performance is uncertain. Payouts get tied to revenue, EBITDA, or other specific milestones after closing.

Seller trap Earn-outs are notoriously hard to hit and even harder to enforce — the buyer controls the business after closing, including the decisions that determine whether you hit your numbers. Negotiate precise definitions, a fixed accounting standard, and acceleration triggers (like a future change of control) before you agree to any earn-out structure.

Exclusivity & no-shop — Favors Buyer

The seller agrees not to solicit or entertain other offers for a set window — often 30–90 days, and frequently extendable.

Negotiation tip for sellers Shorter is better. If you're running a competitive process, push for a "go-shop" period so you're not fully locked out of better offers while this buyer does its diligence.

Due diligence & access — Both Sides, Different Jobs

Buyer gets a window — and access to financials, management, customers — to verify everything in the deal actually holds up.

Seller is generally expected to provide a clean, organized data room.

Practical note for sellers Start preparing your records and documents for the data room before you sign the LOI, not after. Clean financials, contracts (find the signed versions), IP records, compliance docs, and customer lists accelerate good deals — and expose weaknesses on your own timeline instead of the buyer's.

Conditions to closing — Favors Buyer

Regulatory approvals, third-party consents, financing contingencies, and the "MAC/MAE" clause — Material Adverse Change / Material Adverse Effect — which functions as the buyer's escape hatch if the business meaningfully deteriorates between signing and closing. A Seller in a good negotiating position can push to exclude most contingencies.

Break-up fees & reverse termination fees — Cuts Both Ways

These can be penalties for walking away after signing. Sometimes LOIs can include a break-up fee, paid by the seller, which protects the buyer if the seller backs out. A reverse termination fee, paid by the buyer, protects the seller if the buyer walks — not common in smaller deals but more common in larger deals or ones involving buyer financing contingencies. Check which direction the fee actually points before assuming it protects you.

Key employee / founder retention — Impacts Seller-Side Team

Buyers frequently require key people to sign employment or consulting agreements as a condition of closing. If you're a founder or key employee on the Seller's side, read these terms as carefully as the price — they determine what your life looks like after the deal closes, not just what you're paid at closing.

Common pitfalls

For Sellers

  • Over-focusing on headline price while ignoring structure, adjustments, reps & warranties survival periods, and indemnification caps.
  • Agreeing to overly broad exclusivity without a tight, enforceable timeline.
  • Under-preparing for diligence — surprises are what kill deals, or shrink them.
  • Agreeing to indemnity provisions and restrictive covenants without understanding what they mean.

For Buyers

  • Weak protections around working capital mechanics, earn-out definitions, or post-closing covenants.
  • Rushing diligence to keep deal momentum.
  • Not building in enough time for regulatory approvals or financing to actually come together.

Playbook: handling an incoming LOI

Applies whether you're the one who received it or the one who sent it.

  1. 01Read it cold — twice. Once for the business deal, once hunting specifically for legal traps.
  2. 02Model the economics. Build (or have your advisor build) a simple waterfall showing cash at closing under best, base, and worst-case scenarios — including adjustments and earn-outs. If you are the Seller, many financial planners will run these kind of models for you for free (in the hopes you bring your money to them once you sell).
  3. 03Redline strategically. Focus on high-impact items instead of fighting every line (i.e. do not mark up things just to mark them up or to reword them).
  4. 04Involve the right people. Accountant, M&A lawyer, and select key employees — not the whole company.
  5. 05Respond in one clean markup, with or without a short cover note outlining your major points up front.
  6. 06Set — and enforce — timelines. Push for a real target date on the definitive agreement.
  7. 07Prepare your data room in parallel. Speed wins, especially in competitive situations. Time kills deals.

Understanding these mechanics levels the playing field — whether you're the one buying or the one selling.

Future articles on The Deal Daddy

New posts drop regularly. If you're in the middle of buying or selling a business right now, the real-world questions and pain points people bring are what will shape future articles. If there is something you would like to know more about, reach out and suggest it and it may end up as a future article.

The fine print shouldn't be a surprise. Let's make it transparent.

— The Deal Daddy

Disclaimer

This article is for general informational purposes only and does not constitute legal, financial, tax, or other professional advice. It is not a substitute for advice from a qualified attorney, accountant, or financial advisor familiar with your specific situation. No attorney-client, advisor-client, or fiduciary relationship is created by reading this content. Deal terms and their consequences vary widely — consult a qualified professional before making decisions about any actual transaction.

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