Letter of Intent Explained

Описание: A Letter of Intent (LOI) is often viewed by sellers as a non-binding starting point in a business sale, but it is actually one of the most critical documents because it is where you can lose all your leverage. The LOI contains several potential traps, starting with the exclusivity or "no-shop" clause, which is typically legally binding and prevents you from talking to other buyers for a set period. Sellers should aim to keep this window short—30 to 45 days—to maintain competitive tension. Another common trap is the "net working capital" peg, where buyers may hide a secret discount if "normal" levels of cash and inventory are not defined upfront based on the last 12 months of operations.

Earnouts are also risky because once you sell, you no longer control the business decisions that could affect your final payout; therefore, it is safer to tie earnouts to revenue rather than profit. Additionally, you should negotiate specific "baskets" and "caps" for indemnification and escrow to limit your liability to the funds held in escrow rather than your personal assets. Finally, the deal structure itself is a major factor, as an asset purchase can cost a seller a fortune in extra taxes compared to a stock sale. Because an LOI acts as a psychological contract that makes it difficult to change terms later, it is vital to negotiate these hard details while you still have other suitors waiting.