Letter of Intent for Business Sale: What to Negotiate Before You Sign

The LOI is described as "non-binding" — and technically, that's true for most of it. But the deal structure, exclusivity terms, and financial framework you agree to in the LOI become the starting point for everything that follows. Walking back an LOI provision in the purchase agreement is expensive and often impossible. This guide covers what to nail down before you sign.

What an LOI is — and what "non-binding" actually means

A letter of intent (LOI), sometimes called a term sheet or memorandum of understanding, is a preliminary agreement between a seller and a buyer that outlines the key terms of a proposed acquisition before either side invests in full legal and financial due diligence.

Most LOI provisions are non-binding — the purchase price, deal structure, reps and warranties, and closing conditions are all described as "subject to definitive agreement." The buyer has no legal obligation to close at the LOI price.

Two provisions, however, are almost universally binding from the moment both parties sign:

• Exclusivity. You agree not to solicit or entertain competing bids for a defined period — typically 30–90 days. During this period, your leverage evaporates. You've taken the business off the market; the buyer knows it.
• Confidentiality. Both parties agree to keep deal terms and due diligence materials private. This survives termination of the LOI in most cases.

Deal structure: the most important provision in the LOI

Most LOIs specify whether the deal will be structured as an asset sale or a stock sale. This single decision affects your federal tax bill by hundreds of thousands to millions of dollars, and it is far easier to negotiate at the LOI stage than after due diligence has started.

Why buyers prefer asset sales; why sellers prefer stock sales

In an asset sale, the buyer acquires selected assets and liabilities and gets a stepped-up cost basis — meaning future depreciation deductions on equipment, real property, and intangibles. This is valuable to the buyer. From your perspective as the seller, many asset classes (accounts receivable, inventory, depreciation recapture, non-compete payments) are taxed as ordinary income — potentially at 37% — rather than capital gains.¹

In a stock sale, you sell your equity in the business and pay long-term capital gains rates on the full proceeds (if you've held the shares more than one year). At the top federal rate in 2026, that's 20% capital gains plus 3.8% Net Investment Income Tax = 23.8% total federal rate.² The buyer, however, inherits your historical tax basis and gets no step-up.

The gap between these outcomes — on a $10M deal — often exceeds $1M in federal taxes. See our Asset Sale vs. Stock Sale guide for the full 2026 rate table by asset class.

What to do in the LOI

Don't agree to a deal structure that disadvantages you without extracting a corresponding price premium. If a buyer insists on an asset sale, the purchase price needs to be higher to compensate you for the incremental tax cost. This negotiation is most effective before exclusivity kicks in — once you've signed an LOI with asset sale language and exclusivity, your leverage to renegotiate the structure is minimal.

If you're a C-corporation and hold Qualified Small Business Stock (QSBS) under IRC §1202, a stock sale is required to access the federal capital gains exclusion — potentially $15M per taxpayer tax-free under current OBBBA rules. An asset sale disqualifies you entirely from the QSBS exclusion. This must be in the LOI.³ See our QSBS guide for full qualification and stacking details.

Purchase price and adjustments

The headline purchase price in an LOI is rarely the final number. Understanding the adjustment mechanics at the LOI stage prevents surprises at close.

Working capital peg

Most acquisitions include a working capital adjustment: the buyer specifies a "target" level of working capital (current assets minus current liabilities) that should be in the business at close. If actual working capital at close is above the target, you receive additional proceeds; if below, the purchase price is reduced.

The working capital peg is one of the most common sources of post-close purchase price disputes in middle-market M&A. Two things to clarify in the LOI:

• The target level. Buyers often propose a trailing-12-month average. Challenge the methodology: seasonal businesses have wide swings, and a buyer who picks an unusually high trailing month benefits disproportionately.
• The definition of working capital. Cash, short-term debt, deferred revenue, customer deposits, and accrued liabilities can each be defined multiple ways. Nail down what's in and what's out before due diligence, not after.

Earnouts

If the buyer proposes an earnout — contingent payments based on future performance — the LOI should specify the metric, measurement period, cap, and whether the earnout is part of the purchase price or structured as compensation. This distinction is critical: an earnout treated as compensation is ordinary income; an earnout treated as purchase price is capital gains.⁴

See our Earnout Agreement guide for the full tax analysis and structural protections to require.

Seller notes

If the buyer is asking you to hold a seller note (carry part of the financing), the LOI should reflect the principal, interest rate, term, and security. The minimum interest rate on a seller note is the Applicable Federal Rate (AFR); below-market rates trigger imputed interest under IRC §1274.⁵ See our Seller Financing guide for when seller notes make sense and what terms to require.

Exclusivity terms

Exclusivity is the most buyer-favorable binding provision in the LOI. Once you sign, you've effectively taken your business off the market and handed the buyer time to wear you down in due diligence.

Negotiate:

• Duration. 30–45 days is reasonable for a well-prepared seller. 90 days is long. Push back on anything beyond 60 days unless the deal is unusually complex.
• What triggers automatic extension. Buyers routinely request 30-day extensions based on due diligence delays. Cap the total exclusivity period — extensions included — at a firm date.
• A buyer good-faith requirement. Language requiring the buyer to proceed in good faith and use commercially reasonable efforts during exclusivity gives you some protection if the buyer stalls.
• A reverse break-up fee. For deals above $10M, consider negotiating a buyer break-up fee — a cash payment to you if the buyer terminates without cause after exclusivity. This compensates you for taking the business off the market and gives the buyer incentive to close.

Due diligence scope

The LOI typically grants the buyer access to your books, records, and employees for due diligence. Scope this carefully:

• Restrict employee-level interviews until after LOI signing — conversations with key employees about a potential sale before the deal is confirmed can trigger departures and morale problems.
• Limit customer-facing due diligence until late-stage (often after an LOI-stage lender is involved and the deal is tracking toward close).
• Specify how competitively sensitive information will be handled — buyers who are strategic acquirers (your competitors or customers) have commercial reasons to want your customer list, pricing, and operations data even if the deal never closes.

Representations and warranties preview

The LOI won't contain the full reps and warranties (those go in the purchase agreement), but some LOIs outline the seller rep and warranty scope — particularly for transactions where rep and warranty insurance (RWI) is anticipated. If the buyer mentions RWI, flag this for your advisors: how the reps are drafted affects the insurability and scope of the policy, and your financial advisor needs to understand the indemnification exposure to properly model the deal economics.

What to leave for the purchase agreement

Some sellers are pushed to over-specify the LOI, creating a document that functions like a short-form purchase agreement. This is usually a mistake — it narrows your negotiating room in the definitive agreement phase without providing you additional protection. Leave for the purchase agreement:

• Full representations and warranties language
• Indemnification basket, cap, and survival periods
• Non-solicitation and non-compete scope and geography
• Escrow mechanics and release schedule
• Closing conditions beyond the basics

The LOI should be specific enough to govern the deal's financial structure, exclusivity, and process — and no more detailed than that.

The advisor timing problem: most sellers sign the LOI too late

The most common advisory mistake in a business sale is engaging a financial advisor after the LOI is signed. By that point, the deal structure is set, exclusivity is running, and the buyer is in due diligence. The financial advisor is in reactive mode — unwinding bad tax structure choices that were made before they were at the table.

The best pre-sale tax planning — QSBS clock optimization, entity conversion for stock sale treatment, GRAT and estate planning structures, installment sale modeling, ESOP feasibility — typically requires 2–5 years of lead time. See our Exit Planning Timeline for the year-by-year checklist.

Even if that window has passed, a financial advisor engaged before the LOI is signed can model the after-tax impact of asset vs. stock sale, advise on whether an earnout or seller note makes economic sense given your tax situation, and ensure your estate plan doesn't create unnecessary tax at a major liquidity event. See our Estate Planning Before a Business Sale guide.

LOI checklist: what to verify before signing