The letter of intent is the most important document before signing a company sale agreement. We analyse its key clauses, the most relevant negotiation points, and the mistakes that can cost millions.
The letter of intent — also known as the LOI or term sheet — is probably the most important document in a company sale process. It is not the definitive contract, but it is the document that defines the framework for the final negotiation. And what is not negotiated in the letter of intent is rarely achieved afterwards.
Yet many business owners sign letters of intent without fully understanding their scope. Some perceive them as a mere formality before the contract. Others sign them under pressure from the buyer, without adequate advice. And in more than a few cases, what appeared to be a favourable agreement turns out to be a framework that severely limits the seller’s position in subsequent negotiations.
A letter of intent is a document in which a potential buyer expresses their serious interest in acquiring a company (or a stake in it) and sets out the main terms and conditions of the proposed transaction. It typically includes the proposed price or price range, the deal structure, key conditions, an exclusivity period, and a timeline.
The LOI sits between an initial expression of interest (which is purely indicative and non-binding) and the definitive sale and purchase agreement. Its purpose is to ensure that both parties share a common understanding of the fundamental terms before investing the significant time and money required for due diligence, legal drafting, and final negotiation.
The price clause should specify not only the headline number but also the valuation methodology — typically an enterprise value based on an EBITDA multiple, adjusted for net debt and normalised working capital. The most important question is: what adjustments are contemplated? A price of ten million on a cash-free, debt-free basis with a working capital adjustment mechanism can result in a very different net receipt than a flat ten million.
Whether the transaction is structured as a share purchase or an asset purchase has profound tax, legal, and operational implications. The LOI should make this clear, as it affects everything from the seller’s tax bill to the treatment of employees and contracts.
These are the conditions that must be satisfied before the transaction can close. Common conditions include satisfactory due diligence, regulatory approvals, and key employee retention. The critical question is how broadly worded these conditions are — overly broad conditions give the buyer a de facto exit right.
Most LOIs include an exclusivity clause that prevents the seller from negotiating with other potential buyers for a specified period, typically 60 to 120 days. This is reasonable — the buyer needs protection while they invest in due diligence — but the period should not be excessive. An exclusivity period of six months or more gives the buyer disproportionate leverage.
Most LOIs are structured as non-binding with respect to the commercial terms but binding with respect to certain procedural obligations — typically exclusivity, confidentiality, and cost allocation. Understanding which provisions are binding is critical.
Some LOIs include preliminary language about the representations and warranties that will be included in the definitive agreement. Sellers should pay close attention to the breadth and duration of proposed warranties, and particularly to any proposed indemnification caps or baskets.
If part of the price is contingent on future performance (an earn-out), the LOI should specify the metrics, the measurement period, the accounting methodology, and the protections for the seller against buyer actions that could manipulate the metrics.
Signing without professional advice. The LOI is where the negotiating framework is established. Signing without M&A counsel is like entering a chess match having already conceded the centre of the board.
Focusing exclusively on the headline price. A higher headline price with aggressive conditions, broad warranties, and a significant earn-out component may yield a lower net outcome than a lower headline price with clean terms.
Accepting overly broad conditions. A condition that reads “subject to satisfactory due diligence at the buyer’s sole discretion” effectively gives the buyer a free option — they can walk away at any point and for any reason.
Ignoring the exclusivity period. Every day of exclusivity is a day when you cannot talk to other buyers. If the process stalls, you are locked in without leverage.
Not negotiating the timeline. The LOI should include a clear timeline for each phase — due diligence, legal drafting, signing, and closing. Without deadlines, the process can drift indefinitely.
At Blue Mountain, we take the letter of intent very seriously. We believe it should reflect our genuine assessment of value and our real intentions — not an aggressive starting position designed to be renegotiated downward during due diligence. Our LOIs tend to be detailed, transparent, and closely aligned with the final terms of the transaction.
We also recognise that the LOI is the first test of the relationship between buyer and seller. How the negotiation is conducted — with mutual respect or with adversarial tactics — sets the tone for everything that follows.
The letter of intent deserves as much attention as the definitive sale agreement. It is the document that shapes the negotiation, defines the power dynamics, and establishes the expectations of both parties. Take the time to review every clause. Engage professional advisors. And never sign under pressure — a buyer who genuinely values your company will give you the time you need to make an informed decision.
By Blue Mountain Capital
By Blue Mountain Capital
By Blue Mountain Capital
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