Terms in a Letter of Intent

This is a guide to common LOI terms. It is not legal, tax or financial advice. Review any LOI with your M&A attorney before you sign it.

A letter of intent (LOI) is a buyer’s written offer to acquire your company. It sets out the price and the main terms. The binding contract comes later, in the purchase agreement. Most of what gets negotiated in the purchase agreement starts in the LOI.

These are the terms in the order you are likely to meet them.

1. Non-binding, with binding sections

Most of an LOI is non-binding. Either side can walk away. A few sections bind you the day you sign. Exclusivity and confidentiality are the usual ones, and governing law often is too. Look for a section called “Binding Effect” that lists them.

2. Purchase price

The headline purchase price amount is usually set on a “cash-free, debt-free” basis. The buyer pays for the business (the target) without the target’s cash and without the target’s debt. Debt is paid off from the price at closing. Cash above an agreed level may come back to you. The amount you take home can differ from the headline in either direction.

3. Debt-like items

These are liabilities the buyer treats as debt and deducts from the price. Common examples are pre-closing taxes, accrued bonuses, unpaid deal fees, and customer prepayments for work not yet delivered. For a software company, deferred revenue may be treated as debt. An LOI may count prepaid services as debt and prepaid subscriptions as working capital.

4. Working capital target (peg)

The buyer expects the business to arrive with a normal level of working capital (the peg). The core definition of working capital is current assets minus current liabilities. In a typical cash-free, debt-free deal, cash and debt are left out. Current assets and current liabilities include receivables, payables and other day-to-day items. The peg is often an average of the trailing twelve months.[1] The period can be shorter, such as six months, if both sides agree. If working capital at closing is above the peg, the price goes up. If it is below, the price goes down. There can be many adjustments to working capital proposed by the buyer during negotiations. We recommend that you make working capital calculations at the time of the LOI, in order to understand what adjustments a buyer may propose.

5. Holdback or escrow

Part of the price is held back after closing to cover claims the buyer may make, including losses from third-party claims. It may sit with an escrow agent or with the buyer. In recent years the median escrow in private deals has been about 10% of the deal value.[2] Ask how much, for how long, and what releases it.

6. Representations, warranties, indemnification and the basket

Representations and warranties are statements you make about the company, such as the accuracy of its financials. If one proves untrue, the buyer can claim against you. Indemnification grants the buyer the right to recover its losses. The basket is the amount of loss the buyer absorbs before it can claim. The LOI may only name these. The detail is set in the purchase agreement. See our purchase agreement terms.

7. Earnout

An earnout is part of the price paid later, and only if the business hits targets after the sale. It can bridge a gap between what you ask and what the buyer offers. Be careful with earnouts. After closing, the buyer decides staffing, investment, support and focus. You rarely control what decides whether the earnout is earned. Across deals with an earnout, SRS Acquiom reports that close to one in five earnout dollars gets paid.[3]

8. Key assumptions

Some LOIs list the figures the price is based on. For a software company these are often ARR, net and gross revenue retention, and operating costs. If diligence finds lower numbers, expect the buyer to revisit the price. Make sure each number listed is one you can deliver at closing.

9. Due diligence and timing

Diligence is the buyer’s detailed review of your finances, contracts, customers, product and legal position. Buyers often hire outside accounting and law firms for it. The LOI may give a target date to close. Ask what the buyer still needs to see and have it ready.

10. Exclusivity (no-shop)

Once you sign, you stop talking with other buyers for a set period. You may also have to tell the buyer about any approach you receive. One M&A law firm puts the typical period at thirty to sixty days, with longer periods for complex deals.[4] Watch for automatic extensions and agree on what happens if the buyer falls behind its own timeline.

11. Key employee agreements

The buyer may want founders or key staff to sign employment agreements at closing. The LOI may say the terms will be no less favorable than today’s. Ask about role, reporting line and length of commitment before you sign.

This is a guide to common LOI terms. It is not legal, tax or financial advice. Every deal is different, and some LOI terms are binding once you sign. Review any LOI with your M&A attorney before you sign it. As part of our process, ExitHero.app can provide a sample due diligence checklist. The sources below provide more details.

Sources

1. BDO, “Net Working Capital in M&A,” Feb 15, 2019. https://www.bdo.com/insights/advisory/importance-of-net-working-capital-(-nwc-)-in-m-a
2. SRS Acquiom M&A Deal Terms Study. Median 10% in the 2023 study; 10.0% in 2024 and 2025 per the 2026 study, as summarized by DealLawyers.com, Apr 28, 2026. https://www.deallawyers.com/blog/?p=22429
3. SRS Acquiom, “M&A Earnout and Milestone Trends.” https://www.srsacquiom.com/our-insights/ma-earnout-milestone-trends/
4. Aegis Law, “Letters of Intent in M&A: What Founders Sign Away Before They Realize It,” May 27, 2026. https://aegislaw.com/?p=11111