Mergers and Acquisitions

For a business owner, receiving a Letter of Intent (LOI) or Term Sheet is a defining milestone. It validates years of enterprise building and outlines the nominal economics a company sale. However, a seller should understand that he or she will never have more leverage than at the time of the LOI signing. It’s critical for the seller to find solid footing on a well-crafted LOI. Otherwise, the seller will have a very difficult time holding his or her ground in future negotiations.

The Seller’s High-Water Mark

In M&A transactions, the LOI typically represents the seller’s high-water mark for deal terms and leverage.

Before the LOI is signed, you hold maximum leverage:

• You have multiple strategic options (including continuing to operate independently).
• Other prospective buyers may be exploring the opportunity.
• The buyer is competing to earn exclusive access to your business.

The moment you sign an LOI, which almost universally includes a binding Exclusivity (or “No-Shop”) clause, the dynamic shifts. The buyer secures an exclusive 60-to-90-day window to conduct diligence, during which you cannot entertain alternative bids.

Rarely does a deal improve for a seller after exclusivity begins. Instead, buyers use confirmatory diligence to uncover risks, challenge historical earnings, and seek purchase price adjustments, post-closing indemnities, or aggressive escrow holdbacks. If key protections are not locked down before signing, clawing back leverage later is an uphill battle.

Engage Transaction Professionals Before You Sign

A common pitfall is executing an LOI and only then forwarding it to legal, tax, and financial advisors with the instruction to “draft the definitive documents.”

Your advisory team should be fully engaged before an LOI is executed. While core purchase terms may be labeled non-binding, walking back a negotiated term in the definitive agreement introduces friction, invites deal fatigue, and damages transaction goodwill. If a term is agreed upon in the LOI, it creates an anchor that is difficult to dislodge.

Why Involve an M&A Financial Advisor?

Even if you have received one or more attractive unsolicited offers, engaging an experienced financial advisor or investment banker is critical.

• Competitive Tension & Price Discovery: An advisor evaluates whether an inbound offer truly reflects market value or if running a structured process could command a premium.
• Deal Structuring & Defense: They model net proceeds under different consideration structures (cash, rollover equity, earnouts, seller notes).
• Fee Justification: A conscientious investment banker routinely preserves more deal value—through working capital negotiation, competitive tension, and structural defense—than the cost of their advisory fee.

Stress-Test the Deal and Make Your Demands Known

The LOI phase is the time to stress-test the transaction and align expectations. If a prospective buyer cannot accept your non-negotiable terms at the LOI stage—when they are most motivated to win the deal, the buyer will not accept them during late-stage definitive agreement drafting.

Use this window to put your critical operational, governance, and structural priorities on the table:

• Post-Closing Roles & Autonomy: Exactly how long are founders expected to stay, and what authority do they retain?
• Rollover Equity Terms: Are rollover units pari passu with the buyer’s sponsor equity, or are they subordinated?
• Caps and Baskets on Liability: Setting clear boundaries on indemnification exposure up front.
• Closing Timelines & Milestones: Firm exclusivity expiration dates tied to diligence progress.

Address Tax Structuring at the LOI Stage

Deal structure dictates after-tax net proceeds. A major risk in generic LOIs is vague language stating that the transaction will be structured as an “asset purchase” or “stock purchase with a tax election” without analyzing the resulting difference in tax results to the seller.

• Asset Sale vs. Stock Sale: Buyers prefer asset acquisitions to achieve a step-up in depreciable basis, but this can trigger substantial ordinary income tax and double taxation for corporate sellers.
• Section 1202 (QSBS) & Rollover Structuring: If the target qualifies for Qualified Small Business Stock treatment or involves tax-deferred equity rollovers (e.g., Section 721 or Section 351 contributions), the framework must be established before diligence begins.

The Hidden Risks of a One-Sided, Pro-Buyer LOI

Accepting a buyer-favorable LOI template exposes sellers to both commercial and legal vulnerabilities:

Risk Area	Pro-Buyer Trap	Strategic Seller Approach
Working Capital Target	Leaving the peg or mechanism undefined until closing.	Establish the historical methodology (e.g., 12-month trailing average) and specify normalized adjustments directly in the LOI.
Earnouts & Contingent Pay	Broad milestones tied to subjective performance or net income.	Tie earnouts to objective top-line revenue metrics with covenants requiring the buyer to fund the business adequately post-closing.
Exclusivity Duration	Open-ended or lengthy (90+ days) exclusivity without automatic termination triggers.	Limit exclusivity to 45–60 days, conditioned upon the buyer meeting specific diligence delivery milestones.
Indemnification & Escrow	Silence on survival periods, escrow percentages, and liability caps.	Specify maximum indemnity caps (e.g., 5–10% of enterprise value) and standard 12-to-18-month escrow release windows.