Before you sign the letter of intent: seven terms that decide your sale
By Marcus Adeyemi, Partner
Most owners of a Connecticut business will sell a company once. The buyer across the table, whether a private equity platform or a strategic acquirer, may close a dozen deals a year. That gap in experience shows up most clearly in the letter of intent, a document many sellers treat as a formality because it is described as non-binding. In practice, the LOI sets the frame for everything that follows, and once exclusivity is signed, most of the seller's leverage is gone.
1. Exclusivity and its length
The no-shop clause is usually the one binding provision in an LOI, and it matters more than any other. It prevents you from talking to other buyers for a set period while the buyer completes diligence. Buyers commonly ask for 90 to 120 days. We often negotiate 45 to 60 days, with an extension only if the buyer has delivered a draft purchase agreement and confirmed financing.
A shorter window keeps the buyer moving and reduces the risk that a price reduction arrives on day 85, when your other bidders have moved on.
2. The working capital target
Almost every deal includes a working capital adjustment: if the business delivers less working capital at closing than a target figure, the price drops dollar for dollar. Many LOIs say only that the target will be a 'normalized level' to be agreed later. That phrase has cost sellers hundreds of thousands of dollars.
Ask your CPA or banker to calculate a trailing twelve-month average before the LOI is signed, and put a number or at least a methodology in the letter.
3. Escrow, holdbacks and indemnity caps
Buyers hold back part of the price to cover breaches of the seller's representations. In lower middle market deals we routinely see 5 to 15 percent held for 12 to 18 months. Set the escrow size, duration and the overall indemnity cap in the LOI. If the buyer plans to use representations and warranties insurance, the escrow can often be reduced to a fraction of a percent.
The escrow you agree to in the LOI is the escrow you will live with at closing.
4. Asset sale or stock sale
Structure drives taxes and liability. Buyers prefer asset purchases to step up the tax basis and leave liabilities behind. Sellers of C corporations in particular can face double taxation in an asset sale. If the buyer insists on an asset deal, the LOI is the place to request a gross-up or a price adjustment.
5. Earn-outs and how they are measured
An earn-out bridges a valuation gap by paying part of the price later if the business hits targets. The problems arise in the definitions. Revenue is easier to verify than EBITDA, which the buyer can influence through overhead allocations after closing.
- Define the metric and the accounting principles used to measure it.
- Require the buyer to operate the business consistently with past practice.
- Include acceleration if the buyer sells the business or terminates you without cause.
- Give the seller access to the books to verify the calculation.
6. Your role after closing
Many buyers want the owner to stay for a transition period. Salary, title, duration and what happens if the buyer ends the arrangement early all belong in the LOI, along with the scope of any non-compete. Connecticut courts generally enforce sale-of-business non-competes more readily than employment covenants, so the geographic and time limits deserve careful thought.
7. Conditions and financing
Ask whether the offer depends on outside financing, a quality of earnings report, key customer consents or landlord approval. Each condition is a door the buyer can walk through later. Requiring proof of committed financing before exclusivity begins is reasonable and common.
A letter of intent is short, but it is the most consequential document most sellers will sign before the purchase agreement. Have counsel review it before you commit, while competing interest still gives you room to negotiate.
This article is general information, not legal advice, and reading it does not create an attorney-client relationship. Laws change; talk to a lawyer about your specific situation. Learn more about our mergers & acquisitions practice.