Negotiate a Letter of Intent (LOI)

1 From a Non-Binding Offer to a Letter of Intent (LOI)

In the previous module, you learned how to categorize prospective buyers and their offers. These are often valuation estimates or indicative offers—that is, initial price proposals that are still non-binding and often lack detailed terms and conditions.

The Letter of Intent (LOI) takes this a decisive step further: It is a structured document in which the buyer and seller set forth the essential terms of the planned deal—purchase price, transaction structure, payment terms, conditions, and timeline. Timing-wise, it falls between two stages: It comes after a verbal agreement on the core issues (primarily valuation and transaction structure) and before due diligence. Only once the LOI is signed do you grant a serious candidate access to your data room: The LOI gives you the assurance that the buyer is serious before you release confidential documents for review.

In most cases, an LOI is not legally binding—with important exceptions regarding certain protective clauses (see Section 3). This means that the actual purchase agreement is not finalized until after due diligence. However , the terms of the LOI set the framework for the entire deal and are difficult to change later on.

2 LOI Content: What You Need to Know as a Seller

A letter of intent (LOI) contains the key financial terms of the planned deal. As the seller, you should understand every single point. After all, what is agreed upon here sets the framework leading up to the purchase agreement.

The Key Financial Terms

• The Parties: Who is signing on both sides? The parties listed in the LOI should be the same as those in the subsequent purchase agreement. If the company is owned by multiple shareholders, all of them must be on board; otherwise, the agreement applies only to those who have signed. And on the buyer’s side: Is the person buying on their own, or is it a company that has yet to be formed and has no assets? In that case, you’ll need a statement specifying who is responsible for the payment.

• What exactly is being sold: The subject matter must be clearly described: in a share deal, the company along with its subsidiaries and affiliated companies; in an asset deal, the individual assets. Just as important is what is not included and remains with you (e.g., the business premises or a vehicle). Anything left unclear here will become a point of contention later

• Purchase price or price range: The proposed price or a range. Check whether the calculation is transparent: e.g., based on adjusted EBITDA and an industry-standard multiple (→ Module 4: Valuation)

• Enterprise value or payment to you: The point that most often catches sellers of small businesses off guard. The figure in the LOI is generally the enterprise value, calculated as if the company were debt-free and had no bank balances (“cash and debt free”). What you ultimately receive is something different: bank loans, shareholder loans, and lease liabilities are deducted from this figure, while excess cash in the company’s account is added, along with adjustments for working capital and a backlog of investments. This reconciliation is called a price bridge (→ Module 4: Valuation). Insist that the LOI specifies the value you’re basing the calculation on and which items are being deducted and added. Otherwise, you’ll be negotiating over a figure you’ll never actually receive

• Transaction Structure: Share Deal (purchase of company shares) or Asset Deal (purchase of individual assets). The structure helps determine how much of the purchase price, after taxes, you’ll actually receive: the same purchase price can be worth different amounts to you. Clarify this early on with your tax advisor

• Payment Terms: Lump-sum payment, installment payments, earn-out, or seller’s loan. The higher the proportion of the lump-sum payment, the safer it is for you. Often, a portion of the purchase price is withheld or placed in an escrow account as security against potential claims by the buyer arising from your warranties. Clarify the amount and when the funds will be released

• Closing Conditions: Under what conditions will the sale be finalized? Typically: successful due diligence, financing commitment, and, if applicable, third-party consent.

• Buyer’s Assumptions: The price in the LOI is not an arbitrary figure: The buyer derives it from the information and documents you have provided up to that point, making certain assumptions in the process. Typically: that your key metrics are confirmed during the due diligence process, that past results are sustainable, and that key employees remain on board. Insist that these core assumptions be explicitly included in the LOI. This protects you: After the due diligence, if the buyer wants to renegotiate the price, they must specifically identify which assumption was not confirmed. Without documented assumptions, they can reopen price negotiations with general references to the due diligence process, and you’ll have a hard time countering that. Conversely, make sure the assumptions are precisely worded: the vaguer they are, the less useful they’ll be to you

• Timeline: Planned sequence of events from due diligence to closing. Realistic timeframes range from 2 to 4 months

• Purchase Price Mechanism: Is an economic cut-off date defined? Two common models:

  • Locked Box: The cut-off date is in the past (e.g., the most recent annual financial statements). The purchase price is fixed, making it simple and predictable for you as the seller. The catch: Starting from the cutoff date, you may no longer withdraw any money from the company—meaning no dividends, special payments to yourself, or personal withdrawals. This is called “no leakage” and is safeguarded in the purchase agreement

  • Closing Accounts: The final purchase price is not calculated until the closing date. This is more flexible but carries the risk of subsequent adjustments

3 Binding vs. Non-Binding Clauses

An LOI is generally non-binding, but not entirely so. As the seller, you need to understand exactly which parts impose legal obligations on you and which are merely statements of intent.

Generally NOT binding

• Purchase price and payment terms: Subject to due diligence

• Breakdown of the purchase price: How the price is allocated between the fixed purchase price, earn-out, and seller loan may still change following due diligence. The transaction structure itself (share or asset deal), however, is determined early on with your tax advisor and is rarely altered afterward

• Timeline and Milestones: Estimates, not fixed deadlines

• Transition period: Your onboarding period following closing

• Non-Competition and Non-Solicitation Clauses: The actual provisions are included later in the purchase agreement; the LOI typically only outlines the terms (duration, scope). Therefore, they do not take effect until the sale is actually completed—not upon signing the LOI

Generally BINDING

• Confidentiality clause: Both parties agree to keep all exchanged information confidential

• Exclusivity clause: Two variants you need to be aware of as a seller:

  • Negotiation exclusivity (stricter): You may not negotiate with any other prospective buyer during the term

  • Closing exclusivity (less restrictive): You may continue discussions but may not close the transaction with a third party

• Cost Allocation: Each party bears its own costs (attorney, tax advisor, consultant)

• Cost Coverage Agreement in Case of Termination: The standard alternative if you do not want to grant exclusivity—though at your own expense: You cover the buyer’s due diligence costs up to an agreed-upon amount if you terminate negotiations without good cause. In return, the buyer allows you to continue talking to others and merely hedges against its cost risk. Cover the amount and define exactly what constitutes a valid reason

• Break-up Fee: Compensation for withdrawal without cause. It is usually agreed upon in favor of the buyer to secure exclusivity. While it is conceivable to have one in your favor, it is difficult to enforce

• Governing Law and Jurisdiction: Which law applies and which court has jurisdiction in the event of a dispute. A formality, but legally binding

4 Room to Negotiate as a Seller

An LOI is the starting point of the negotiation, not the end. As a seller, you have room to maneuver in many areas. Take advantage of it before you sign.

What You Can and Should Negotiate

• Purchase price: The price stated in the LOI is a proposal—negotiate it if it doesn’t meet your expectations. Insist on a transparent calculation (multiple, adjusted EBITDA)

• Purchase price structure: A “locked box” is generally the safest option for you as a seller compared to closing accounts, because the price is fixed.

• Payment structure: The higher the proportion of the upfront payment, the safer it is for you. In practice, however, a seller loan is often a prerequisite for financing smaller transactions at all: The buyer’s bank expects you to defer a portion of the payment and thus remain exposed to some risk. This is a matter of balancing priorities, not a hard-and-fast rule. Insisting on 100% upfront payment may cause you to lose a good buyer. Therefore, focus your negotiations less on whether to accept the deal and more on the terms: the amount of the deferred portion, the term, the interest rate, the priority of claims, and what collateral you receive. An earn-out is something different: It isn’t tied to the financing but bridges the gap between differing price expectations. Here, you bear the risk of future performance, so caution is warranted

• Earn-out protection: If part of the purchase price depends on future results, the buyer decides—after the sale—exactly which figures your payment depends on. Therefore, agree that the buyer will continue to run the business during the earn-out phase as before and will not take any actions that artificially depress earnings. Also agree that you will have access to the figures used as the basis for settlement

• Exclusivity Period: Keep it as short as possible and link it to the timeline: It should not last longer than the planned due diligence process. Agree to an extension only if the buyer is making visible progress. Also, check whether closing exclusivity is possible instead of negotiation exclusivity

• Non-compete clause: Duration and geographic scope: A clause that is too long or too broad will unnecessarily restrict you. A duration of 1–2 years within the immediate market area is standard

• Liability Provisions: In the purchase agreement, you as the seller will have to provide warranties—for example, that the annual financial statements are accurate or that there are no hidden liabilities. If these warranties turn out to be false, you are liable. The LOI can already establish the framework for this: liability caps, statutes of limitations, and thresholds. Make sure these limits are fair and limit your risk

• Transition period and your role: How long will you stay on after closing, and in what capacity? In an advisory or operational role? Also clarify the compensation

• Commitments regarding your team: Agreements to protect your employees after the sale—often a key concern for sellers. Not to be confused with the warranties you provide to the buyer: Here, the buyer is making a commitment to you, not the other way around