What should I negotiate in a letter of intent before I sign it?

By Michael D. Rubin, CEO & Founder · November 2026 · 2,426 words

Negotiate everything that decides what you actually take home before you sign: the price and how it is paid, the cash you receive at closing, any earnout, seller note or equity rollover, the working capital target, the escrow and indemnity framework, how long exclusivity lasts, the diligence scope and timetable, your role after closing, and any financing or other conditions. Settle those terms while several buyers are still competing. Once you sign and exclusivity starts, you give up the right to talk to other buyers for a period, and with it most of your leverage if the chosen buyer later asks for changes.

A letter of intent is short, but it sets the economics of the whole sale. The purchase agreement that follows usually fills in detail around those terms rather than reopening them, so anything left vague in the LOI tends to be decided later, when the buyer holds the stronger hand.

Why the timing of these terms matters

Competition, not persuasion, moves the number. In step 6 of our ten-step process, we receive multiple letters of intent and negotiate with several buyers and buyer groups at once. That is the window to improve both the price and the obligations attached to it.

In step 7, we review every offer with the owner in person. We have a fiduciary duty to present every offer. You accept, reject or counter, with our advice on structure as well as price. A partner of our firm is in every negotiation.

An LOI usually separates nonbinding deal terms from provisions that bind both sides as soon as it is signed, often exclusivity and confidentiality. The actual wording matters, so your transaction attorney should tell you what becomes enforceable at signing and what still depends on the definitive agreements.

We negotiate the business terms alongside your transaction attorney and CPA. They draft the legal documents and advise on legal and tax questions. Our role is to make the economics, the risks and the path to closing clear before you choose a buyer.

Settle the price, payment structure and cash at closing

Start with what the buyer is purchasing. Does the offer contemplate buying assets or ownership interests? Which operating assets, real estate, intellectual property or other interests are included? Identify exclusions before comparing offers. Your attorney and CPA should evaluate the legal and tax consequences of the proposed structure.

Next, define the price. An enterprise value headline does not, by itself, establish the amount you receive. The LOI should explain the treatment of cash, debt, debt-like obligations, transaction expenses and working capital adjustments. Avoid allowing a buyer to introduce a broad definition of deductions after exclusivity begins.

Ask for a written bridge from the stated purchase price to estimated cash delivered to you at closing. Separate the buyer’s closing payment from your proceeds after debt repayment, expenses, holdbacks and other deductions. Have your CPA assess the tax implications separately.

Every component should have a name and a purpose:

Ask the buyer to reconcile this table to the total offer. A payment cannot be both guaranteed cash and contingent consideration. Likewise, a rollover investment should not be presented as money you can spend at closing.

When comparing an all-cash offer with a seller-financed offer, evaluate timing, collectability and the buyer’s ability to close alongside the headline price. A larger stated price may require you to accept more risk.

Define the earnout, seller note and rollover separately

These structures solve different buyer needs and create different seller exposures. “Terms to be agreed” leaves too much unresolved if any component materially affects your decision to sell.

For an earnout, negotiate how performance becomes payment. Identify the measurement period, metric, thresholds, calculation method, payment timing and any maximum payment. Specify which business activities and entities contribute to the calculation.

Then examine control. Who sets budgets, allocates overhead, changes pricing or moves customers after closing? Could integration costs reduce the metric? What reporting will you receive, and how will calculation disputes be resolved?

An earnout tied to earnings requires attention to accounting policies and expense allocation. One tied to revenue still requires definitions for recognition, returns, discounts and transferred accounts. The LOI should establish the commercial framework for protections your attorney will document. Our discussion of should you accept an earnout addresses the broader decision.

For a seller note, negotiate the lending relationship. Settle principal, interest, payment schedule, maturity, security, guarantees if proposed, and priority relative to other lenders. Ask whether senior financing could restrict payments to you.

Clarify whether the buyer proposes to offset indemnity claims against note payments. A disputed claim could affect cash you expected to receive. Have counsel evaluate remedies and protections before treating the note as dependable proceeds.

For rollover equity, identify exactly what you will own. Establish the entity, valuation, equity class and proposed ownership interest. Ask about dilution, distributions, governance, transfer restrictions and future exit rights.

Find out how other investors’ rights compare with yours and what happens to your investment if your employment ends. Your CPA should evaluate the tax treatment. Continued ownership can offer upside, but it also keeps capital exposed and may limit when you can access it.

If you would not accept the transaction without a particular protection, raise it while competing buyers remain available. Do not rely on an expectation that the definitive documents will resolve it favorably.

Agree on working capital before it becomes a price reduction

Working capital deserves its own negotiation because it can change the economics without changing the headline price. The central question is what level of operating current assets and liabilities the buyer expects you to deliver at closing.

The LOI should establish the target or a defined method for calculating it. If the target remains subject to verification, identify the reference period, accounting basis and approval process. “Normal working capital” needs an agreed meaning.

Review the business behind the balance sheet. Seasonality, inventory purchases, customer payment patterns and supplier terms can affect what operating capital the company needs. A target based on an unrepresentative period can create a closing obligation the owner did not anticipate.

We want the parties to address:

• Which receivables, inventory, prepayments and operating liabilities are included.
• How aged receivables, obsolete inventory, reserves and accrued expenses are treated.
• Which items are excluded because they are classified as cash, debt or transaction expenses.
• How the estimated closing adjustment and later reconciliation will work.
• Who reviews a disputed calculation and how it is resolved.

Guard against counting the same item twice. An obligation classified as debt should not also reduce proceeds through working capital without an expressly agreed reason. Your CPA should test the definitions against actual company accounts.

The LOI need not contain the final accounting schedule, but it should establish the economic understanding that schedule will implement. Our explanation of how working capital affects the purchase price provides additional context.

Establish the escrow and indemnity framework

A sale price is incomplete if the buyer can retain an undefined portion or pursue claims without an understood framework. Negotiate the commercial boundaries before signing, then have your attorney develop the detailed provisions.

For an escrow or holdback, identify the proposed amount or formula, its purpose, release timing and treatment of unresolved claims. Distinguish funds reserved for indemnity claims from funds securing a working capital adjustment or another obligation.

Ask who holds the money and what permits its release. Establish whether a pending claim holds back only the disputed amount or can delay a larger distribution. The final documents must resolve these mechanics.

For indemnification, discuss the proposed limits on seller exposure:

• The general cap and any categories proposed for different treatment.
• The threshold or deductible governing when claims become payable.
• The periods during which claims may be brought.
• Whether recovery is limited to escrow or may reach other proceeds.
• Any proposed special indemnities for identified issues.

Definitions and exceptions can change the meaning of an apparent limit. Your attorney should assess how the provisions interact and whether other remedies could apply.

We seek enough agreement to prevent a fundamental economic dispute from emerging after the buyer has exclusivity. Detailed legal drafting belongs with counsel. For the owner’s commercial perspective, see how escrow and indemnification limits work.

Trade exclusivity for a defined path to closing

Exclusivity gives the selected buyer a protected period to investigate and negotiate within the agreed restrictions. For the owner, it means surrendering some freedom to pursue alternatives. That concession should have a clear purpose, endpoint and set of buyer responsibilities.

Negotiate the starting event and expiration date. Ask your attorney to explain whether the no-shop restricts solicitation, discussions, information sharing, responses to unsolicited approaches or other activity. The wording determines what you can do.

Once exclusivity begins, competing buyers may redirect their attention and capital. You also begin investing management time and professional fees in the selected transaction. If the buyer later asks for a lower price or different structure, restarting competition may require time and renewed buyer interest.

That is why the length should connect to the work. Ask the buyer to explain its diligence plan, financing status, internal approvals and document timetable. A request for more time should come with a credible reason.

Negotiate dated milestones for major diligence requests, financing evidence, initial purchase agreement delivery and the targeted closing. Ask counsel whether exclusivity should end or become terminable if the buyer misses agreed milestones or materially changes the proposed economics.

Avoid an extension mechanism you do not understand. Before agreeing to additional time, review what the buyer has completed, what remains open and whether the original offer still stands. Exact durations vary by deal and should reflect the transaction’s requirements.

Our approach to negotiating several competing offers helps owners use the period before exclusivity to resolve these issues. Competition is most useful while you still have the contractual freedom to act on it.

Set diligence scope, financing conditions and your future role

In our process, step 8 begins after the LOI is signed: the buyer conducts due diligence to verify what it was told. Agree on the scope, access rules and timetable before that work begins.

Every buyer signs a confidentiality agreement and completes a buyer profile, and we test whether the buyer can actually fund the purchase. Customer names, key contracts and employee details typically wait until an LOI is signed and diligence begins.

The diligence plan should identify the financial, tax, legal, operational and commercial review the buyer expects. Establish how requests will be coordinated, who may contact employees or customers, and when visits or interviews may occur. Sensitive disclosures need controlled sequencing.

Require the buyer to identify its advisers and provide a consolidated request process. Agree on how new issues will be raised and distinguish unresolved questions from requests that have already been answered. A timetable should account for your team’s operating responsibilities.

Financing requires its own discussion. Identify the purchasing entity, equity source, proposed lenders and approvals still outstanding. Ask what funding evidence exists and which conditions remain before money can be delivered.

If financing is a closing condition, understand what happens if it fails. Discuss the buyer’s obligations to pursue funding, provide updates and meet deadlines. Have counsel evaluate the wording of financing, diligence, approval, consent and other conditions.

Review the conditions together. A purchase proposal subject to unresolved funding, broad diligence discretion and incomplete investment approval carries execution risk. The commercial question is whether you are willing to grant exclusivity while those matters remain open.

Your post-closing role also belongs in the LOI. Define whether the buyer expects employment, consulting, a transition period or ongoing management. Settle duties, time commitment, compensation, location or travel expectations, reporting relationships and expected duration.

Ask what happens if either party ends the relationship. If employment affects an earnout, seller note or rollover equity, resolve that connection before signing. Your attorney should also review proposed restrictive covenants, including their scope and duration.

For the next stage, read what happens after you sign a letter of intent. Before granting exclusivity, you should understand the work ahead and the buyer’s obligations throughout it.

Make the signing decision with the entire offer in view

We recommend a final commercial review with the owner, transaction attorney and CPA. Put the latest LOI beside a written summary of proceeds, retained risk, buyer conditions and required owner commitments.

Resolve inconsistencies before signing. If an email promises cash at closing but the LOI permits deferred payment, the discrepancy needs attention. If a material term remains open, identify who will resolve it, what information is needed and whether you can accept the uncertainty.

Use these decision questions:

• Does estimated closing cash meet your personal and financial objectives?
• Can you tolerate delayed, contingent or reinvested proceeds?
• Are working capital obligations and potential claims bounded by an understood framework?
• Has the buyer demonstrated a credible funding and closing plan?
• Does exclusivity provide enough accountability for the time you are granting?
• Can you perform the proposed transition role on the stated terms?

Through sell-side representation, we help owners compare offers and negotiate these tradeoffs. Our fee is entirely performance based: an industry-standard success fee if and when the company sells. If no transaction is completed, the owner owes us nothing. Your attorney and CPA advise on their respective legal and tax matters.

If you are preparing for a sale, our pre-exit consulting can help identify issues to address before buyers evaluate them.

MDR & Associates has closed more than 250 transactions since Michael D. Rubin founded the firm in 2008, for owners of privately held companies with $3 million to $100 million in revenue. Our corporate office is in Frisco, Texas, and our advisors come to you. We work with owners in Dallas/Fort Worth, Frisco, Austin, Houston, San Antonio and beyond.

Before you commit to a buyer, schedule a confidential conversation or call (855) 637-2776. Bring the full offer, including its proposed payment structure and conditions, so the discussion starts with the actual decision.

Where this fitsHow a business sale works, step by step →

Questions owners ask next

Is a letter of intent binding when selling a business?

An LOI may combine nonbinding purchase terms with binding provisions, such as confidentiality or exclusivity. Your transaction attorney should review the wording and explain which obligations take effect when you sign. Do not assume the title makes the entire document nonbinding.

Should the working capital target be in the LOI?

The LOI should establish the target or a defined method for determining it, including the accounting basis and treatment of material items. Leaving the entire issue unresolved can create a significant economic disagreement during diligence.

Can a buyer change the price after the LOI is signed?

A buyer may propose changes after reviewing diligence findings. Your response depends on the facts, the documents and your alternatives. An LOI does not guarantee a closing at the stated price. Negotiate clear assumptions and adjustment mechanisms before signing.

How long should exclusivity last?

The appropriate period varies by deal. It should reflect the agreed diligence, financing and documentation work, with an expiration date and meaningful milestones. Review extension and termination provisions with your attorney before accepting the no-shop obligation.

Do I have to accept an earnout or stay after closing?

You can negotiate both matters before signing. A buyer may make an earnout or continued involvement part of its offer, and you decide whether those terms meet your objectives. Define payment conditions and your proposed role before entering exclusivity. We help owners turn competing interest into a clearly negotiated offer. To discuss your sale, request a free, confidential snapshot valuation or call MDR & Associates at (855) 637-2776.

Sources and further reading

• IRS: About Form 8594, Asset Acquisition Statement Under Section 1060
• IRS Publication 537, Installment Sales