The Anatomy of a B2B SaaS LOI

The first time most founders see a Letter of Intent is the day they receive one. They've spent months, sometimes years, building toward this moment. The conversations, the NDAs, the management presentations, the follow-up calls. And then, finally, an email arrives with a PDF attached. The subject line says something like "LOI – Project [Codename]" and suddenly the abstract possibility of selling your company becomes very, very real.

That document, typically four to eight pages of dense legal language, will define the economic parameters of the most significant financial transaction of your life. And here's the uncomfortable truth: the buyer who sent it has probably signed dozens of LOIs. Their lawyers have drafted hundreds. They know exactly which provisions matter, which ones are negotiable, and which ones are designed to look standard while quietly shifting risk onto you.

You, on the other hand, are doing this for the first time.

This chapter is designed to eliminate that information asymmetry. By the end of it, you'll understand every material provision in a typical B2B SaaS LOI, know what's negotiable and what isn't, and be able to evaluate competing offers on their true economic merits rather than their headline numbers.

Because here’s what most founders learn too late: the LOI sets the ceiling, not the floor. Terms almost never get better after you sign. The leverage you have at the LOI stage—when buyers are competing for exclusivity—is the most leverage you’ll have until the wire hits your account.

What an LOI Actually Is (and Isn't)

The Legal Nature of LOIs

A Letter of Intent is a strange legal document. Most of it isn't legally binding. The purchase price, the structure, the timeline: a buyer can walk away from all of that without consequence. But buried within that non-binding framework are several provisions that are absolutely, unequivocally binding and enforceable.

Understanding this distinction is critical.

Non-binding provisions typically include:

• The purchase price and enterprise value
• The payment structure (cash, rollover, earnout)
• The closing timeline
• Due diligence scope
• Working capital targets
• Employment arrangements

Binding provisions almost always include:

• Exclusivity (No-Shop): You cannot talk to other buyers during the exclusivity period
• Confidentiality: You cannot disclose that the LOI exists or its terms
• Conduct of Business: You must operate in the ordinary course and not do anything unusual
• Expenses: Each party bears its own costs
• Governing Law: Which state's laws apply

The binding provisions exist because they have immediate, real-world consequences. When you sign an LOI, you're not committing to sell your company, but you are committing to stop talking to everyone else, keep your mouth shut, and not do anything that might change the business the buyer thinks they're acquiring.

Buyers want the economic terms non-binding because it preserves their flexibility. They haven't finished diligence. They might find something they don't like. They might fail to secure financing. They might simply change their minds. The non-binding nature gives them an escape hatch.

You, on the other hand, are bound by exclusivity from the moment you sign. You've just agreed to take your company off the market, often for 60 to 90 days, in exchange for nothing more than a promise to negotiate in good faith.

This asymmetry is intentional. Understand it.

LOI vs. IOI vs. Term Sheet

You'll encounter several types of preliminary documents in an M&A process:

Indication of Interest (IOI): An earlier, less detailed expression of interest. IOIs typically include a valuation range rather than a specific number, describe the general deal structure, and (critically) usually do not request exclusivity. An IOI is a buyer saying "we're interested enough to keep talking." If your process has a lot of interest, your banker might request IOIs from multiple bidders and use them to narrow the field before allowing access to you (through management meetings).

Letter of Intent (LOI): A more detailed proposal with specific terms. LOIs include a defined purchase price, detailed payment structure, and a request for exclusivity. An LOI is a buyer saying "we want to move forward and lock this up."

The Psychology of LOIs

Receiving an LOI is an emotional moment. Someone wants to pay millions of dollars for the thing you built. It's validating in a way that no amount of revenue growth or customer praise can match.

That emotional high is dangerous.

Buyers know that founders get excited. They know that the LOI represents a psychological commitment point. And sophisticated buyers use this knowledge to their advantage. They'll make the headline number attractive, bury complexity in the structure, and then rely on your emotional attachment to the deal—and the exclusivity clock, to push through terms you might otherwise reject.

The best protection against this dynamic is time and perspective. Never sign an LOI the day you receive it. Have your lawyer review it. Have your banker stress-test the structure. Sleep on it. The buyer will tell you they need an answer immediately; they almost never actually do.

The Core Economic Terms

The economic terms are what everyone focuses on—and for good reason. This is the money. But the headline "enterprise value" number in an LOI is not what you'll receive. Understanding the gap between EV and your actual proceeds means unpacking several interconnected provisions.

Enterprise Value and Purchase Price

LOIs typically express value on a "cash-free, debt-free" basis. This means:

• Cash-free: Any cash in the company at closing belongs to you (the seller), not the buyer
• Debt-free: Any debt must be paid off at closing, reducing your proceeds

The enterprise value is a theoretical number representing what the business is worth independent of its capital structure. Your actual proceeds equal:

EV + Cash on Hand − Debt − Transaction Expenses − Working Capital Adjustment − Escrow Holdback = Proceeds

Each of those deductions can be substantial. We'll address them in turn.

Watch carefully for "up to" language in LOIs. An LOI stating "enterprise value of up to $50 million" is not offering you $50 million. It's telling you that $50 million is the absolute ceiling, achievable only if every earnout is hit and every adjustment goes your way. The realistic number is almost certainly lower.

Similarly, watch for how the purchase price is calculated. Some LOIs specify a multiple applied to a specific metric ("4.5x LTM Revenue of $3.2M") vs just a fixed number "$14.4M". These may seem the same, but make extremely sure that you're comfortable with the revenue (or ARR or whatever) they're basing the number on. In the above example, if during DD they are able to argue that actually revenue was $3M (maybe because of accounting practices), you can be sure the new purchase price is now $13.5M (4.5 x $3M) - ooops >$1M lost.

The Payment Mix

The enterprise value is paid in some combination of the following:

Cash at Close

This is the only "real" money in the transaction. It's the wire that hits your account on closing day, after which nobody can take it back. Everything else (rollover equity, earnouts, seller notes) is contingent, deferred, or both.

In the $2-20M ARR B2B SaaS market, cash at close typically represents 50-80% of the headline enterprise value. Anything above 80% is excellent. Below 50% should give you pause unless the buyer has a compelling reason and the non-cash components are genuinely attractive.

Several factors reduce your cash at close:

• Escrow holdback: Typically 10-15% of purchase price, held for 12-18 months
• Working capital adjustment: Could go either direction, but often a surprise reduction
• Debt payoff: All company debt satisfied at closing
• Transaction expenses: Your banker fees, legal fees, accounting fees
• Investor payouts: If your investors receive different treatment (often all-cash) than founders (often cash + roll), your cash percentage may be lower than the deal's overall cash percentage

A real example: An LOI offers $100M EV with 70% cash. That's $70M, right? Not quite. Subtract a 10% escrow ($10M held back), a $2M working capital shortfall, $1M in transaction fees, and $500K in debt payoff. Your actual wire on day one is $56.5M, with another $10M in escrow you might get back in 18 months. The "70% cash" deal is actually more like 50% cash at close.

Rollover Equity

Rolling equity means reinvesting a portion of your proceeds into the acquiring entity. In PE deals, this is nearly standard—10-25% of total consideration is typical. PE firms want you to have "skin in the game" post-close, and their LPs expect to see seller rollover as a signal of confidence.

When evaluating rollover, the key questions are:

Into what entity are you rolling? If you're being acquired by a PE firm's portfolio company, are you rolling into that specific company (NewCo) or into the larger fund? Rolling into NewCo ties your outcome to that specific investment. Rolling into a fund gives you diversified exposure but usually worse economics.

At what valuation? You obviously want this to be as low as possible, while the buyer obviously wants it to be as high as possible. Push for investing at the same valuation the buyer did most recently, rather than (what we often see in VC backed "acquihires") a "valuation" based on the "upcoming Series Bla".

What class of equity? PE funds typically invest in preferred equity with various protections. As a rolling seller, you might receive common equity that sits below the fund's preferred in the capital stack. In a downside scenario, the fund gets paid before you do. In some cases you can negotiate pari passu treatment (rolling into the same security as the fund), but this isn't automatic. You should obviously understand the preference stack above you, just like you would on any other investment.

What's the liquidity timeline? PE funds typically target exits in 3-5 years. You're not getting that rollover money back until they sell or recapitalize. Some buyers offer put/call arrangements that give you a guaranteed exit at a specified multiple after a certain number of years. This is valuable. Negotiate for it.

Chapter 4 covers rollover equity in more detail, including the tax treatment (which can be favorable, since a properly structured rollover may be tax-deferred).

Earnouts

Earnouts bridge valuation gaps. When you believe your business will grow 50% next year and the buyer believes it will grow 20%, an earnout lets you both be right: the buyer pays a base price reflecting their conservative assumptions, and you earn additional consideration if your optimistic projections materialize.

The problem is that earnouts are paid after you've lost control of the business. The buyer now makes the decisions (about pricing, about hiring, about investment) that will determine whether the earnout metrics are achieved. This creates obvious incentive problems.

Well-designed earnouts share several characteristics:

• Single metric: One clear number, not multiple hurdles that must all be achieved
• Seller-influenceable: Tied to something you can actually affect
• Sliding scale: Partial achievement yields partial payout, not a binary cliff
• Clear measurement: Unambiguous definitions, neutral arbitration for disputes
• Protection provisions: Acceleration on termination without cause or sale

Poorly-designed earnouts (the kind that "never pay") have the opposite characteristics:

• Multiple conflicting hurdles: Hit revenue AND margin AND retention targets
• Binary cliffs: Miss by $1 and get nothing
• Buyer-controlled metrics: Tied to the combined company's performance, not just your legacy business
• Vague definitions: "Revenue" without specifying GAAP, recognition timing, or exclusions
• No protection: Buyer can fire you, starve the business of resources, or sell the company, and your earnout evaporates

Seller Notes

A seller note is debt you extend to the buyer. Instead of receiving cash at close, you're financing part of the purchase, essentially lending money to the people buying your company.

Seller notes appear more frequently in smaller deals (under $10M) or when buyers are stretching to meet valuation expectations. They're less common in the $2-20M ARR range where PE buyers typically have adequate committed capital.

If you're asked to hold a seller note, treat it like what it is: a loan to a business you no longer control. Key terms to negotiate:

• Interest rate: 5-8% is typical
• Term: 2-5 years
• Security: Is the note secured by company assets? Is it guaranteed by the buyer?
• Seniority: Where does it sit relative to the buyer's other debt?
• Acceleration: What events trigger early repayment?
• Change of control: What happens if the buyer sells?

The best seller notes are secured, senior, and include acceleration on change of control. The worst are unsecured, subordinated, and allow the buyer to sell the company without repaying you.

Working Capital: The Hidden Adjustment

Working capital is the cash required to operate a business on a day-to-day basis. When you sell, the buyer needs the business to have enough working capital to continue operating—they shouldn't have to inject cash immediately after closing just to make payroll or pay vendors.

The LOI establishes a working capital "target"—typically based on the trailing twelve-month average. At closing, actual working capital is compared to the target, and the purchase price is adjusted accordingly. If working capital is above target, you get more. If it's below target, you get less.

This sounds simple. In practice, it's one of the most contentious aspects of M&A transactions.

The problems start with definition. "Working capital" generally means current assets minus current liabilities, but which assets and which liabilities? Does it include prepaid expenses? Accrued bonuses? Deferred revenue? The buyer and seller often have different views, and the differences can amount to hundreds of thousands or even millions of dollars.

For SaaS businesses specifically, deferred revenue creates particular complexity. If you sell annual subscriptions paid upfront, you have significant deferred revenue on your balance sheet—a liability representing services you've promised to deliver. The buyer acquires that liability and must deliver those services. Should deferred revenue count in the working capital calculation? If so, your working capital is likely negative, and you may owe money at closing.

What to watch for:

• No mention of Working Capital: If no mention of working capital exists in the LOI, push to define it before signing
• Unusual definitions: Items excluded from current assets or included in current liabilities that seem non-standard
• "Excess" working capital provisions: Some buyers try to establish targets above historical norms, guaranteeing themselves a positive adjustment
• Deferred revenue treatment: Understand whether it's included and the implications for your proceeds

The single best protection is having clean, GAAP-compliant financials and a clear understanding of your historical working capital before entering the process. If you know your trailing twelve-month average working capital is -$100K, you won't be surprised when the buyer proposes that as the target.

The Holdback / Escrow

Every acquisition includes representations and warranties—legal statements you make about the business (it owns its IP, it's compliant with laws, its financials are accurate, etc.). If those statements turn out to be false and the buyer suffers damages, they'll want recourse.

The traditional approach is an escrow holdback: a portion of the purchase price (typically 10-15%) is held by a neutral third party for some period (typically 12-18 months). If the buyer has valid indemnification claims because your reps were wrong and they were harmed, the claims get paid from escrow. Whatever remains gets released to you.

For larger deals (typically $25M+ EV, sometimes lower), Representations and Warranties Insurance (RWI) offers an alternative. The buyer purchases an insurance policy that covers indemnification claims. This allows a smaller holdback (often just 1-2% as a deductible) and gives you cleaner economics at close.

If the LOI is vague on R&W, ask before signing:

• What escrow percentage and duration does the buyer expect?
• Will RWI be used? Who pays the premium?
• What's the expected indemnification cap for non-fundamental reps?
• What reps are considered "fundamental" (with higher caps and longer survival)?

These details matter. An escrow of 15% for 18 months versus 10% for 12 months is real money, either in terms of when you receive it or the risk that it gets eaten by claims.

Deal Structure and Mechanics

Stock vs. Asset Purchase

LOIs specify whether the buyer is acquiring stock (buying your company's shares) or assets (buying specific company assets, leaving the corporate shell behind).

For founders, stock purchases are almost always preferable:

• Tax treatment: Stock sales generally qualify for capital gains rates, while asset sales can trigger ordinary income and double taxation (corporate level then shareholder level)
• Simplicity: All assets, contracts, and liabilities transfer automatically
• QSBS eligibility: If you hold Qualified Small Business Stock, you may be eligible for significant tax exclusions on a stock sale that don't apply to asset sales

Most LOIs in the B2B SaaS space specify stock purchases. If a buyer proposes an asset purchase, understand why and quantify the tax impact. You may need a higher purchase price to net the same after-tax proceeds.

Debt-Free, Cash-Free Basis

Nearly every LOI specifies that the company will be delivered "debt-free and cash-free." This means:

Debt-free: All company debt must be repaid at or before closing. This includes bank loans, lines of credit, shareholder loans, capital leases, and sometimes other items the buyer considers "debt-like" (accrued bonuses, deferred compensation, etc.).

Cash-free: Any cash remaining in the company after paying debt and transaction expenses belongs to you. This is your cash, generated by the business you built, and it's not included in the enterprise value.

Watch for aggressive "debt-like items" definitions. Some buyers try to classify ordinary liabilities (accrued vacation, future lease payments, normal accounts payable) as debt, reducing your proceeds. Push back on anything that's part of normal business operations.

Transaction Expenses

Each party typically bears its own transaction expenses. This is standard.

Your expenses will include:

• M&A advisor/banker fees: If you're using Discretion Capital or similar, expect 3-7% of transaction value.
• Legal fees: M&A attorneys typically charge $75-200K for sell-side representation at this deal size. Note that most legal fees are due even if a deal doesn't close.
• Accounting fees: Tax planning, deal support, may be $20-50K
• Other: Quality of earnings support, data room costs, misc.

The LOI should confirm that each party bears its own expenses. Watch for language attempting to shift buyer costs (like their legal or diligence fees) onto the seller or deduct them from the purchase price.

The Binding Provisions That Matter

The economic terms might get all the attention, but the binding provisions have immediate, enforceable consequences. These are the parts of the LOI that actually constrain your behavior from the moment you sign.

Exclusivity (No-Shop)

When you sign an LOI with an exclusivity provision, you're agreeing to stop talking to all other potential buyers for a specified period. You can't solicit new interest, respond to inbound inquiries, or continue conversations that were already in progress. You've taken your company off the market.

This is a significant concession. In exchange, you're getting nothing binding. The buyer can still walk away. They can fail to close for any reason. They can drag out diligence and then retrade. The exclusivity protects them; it costs you.

Typical durations: 45-90 days is standard. Shorter is better for you. Anything over 90 days should raise questions.

Auto-renewal provisions: Many LOIs include automatic extensions if certain conditions are met (or not met). "Exclusivity shall automatically extend for successive 15-day periods so long as the parties are negotiating in good faith" can turn 60-day exclusivity into a 6-month lockup. Negotiate caps on extensions or require your consent for each extension (at least after the first one).

What happens if you breach: Some LOIs require you to reimburse the buyer's expenses if you violate exclusivity. Others include breakup fees. Read these provisions carefully. They create real liability.

Termination rights: Can you terminate exclusivity if the buyer fails to meet milestones? If they haven't delivered a draft purchase agreement by day 45, should you have the right to walk? Consider negotiating termination triggers tied to buyer performance.

Conduct of Business (Ordinary Course)

From LOI signing until closing (or termination), you'll be required to operate the business in the "ordinary course." This means no unusual transactions, no significant changes, and nothing that would materially alter the business the buyer is acquiring.

Specific restrictions typically include:

• No selling material assets
• No unusual compensation increases or bonuses
• No hiring or firing of key personnel (without consent)
• No entering into material contracts
• No issuing equity or taking on debt
• No changing accounting practices

These restrictions make sense from the buyer's perspective—they want to know the business they're buying is the same business they did diligence on. But overly restrictive conduct provisions can hamper operations.

The conduct of business provisions become real constraints during a lengthy exclusivity period. If diligence drags on for four months, you may find yourself unable to make normal business decisions without buyer approval.

“Their experience of having conducted so many similar transactions was invaluable in helping calibrate how to respond at each stage of the process. I always had the strong sense Discretion were acting purely in our interests.”

Daniel Roberts

Founder, SKUVantage

Confidentiality

LOIs are confidential. You generally cannot disclose:

• The existence of the LOI
• The identity of the buyer
• The terms being discussed

Exceptions typically include disclosures to:

• Your legal and financial advisors
• Key employees who need to know (carefully managed)
• Existing investors (usually required anyway)
• As required by law

Breaching confidentiality can have serious consequences. Buyers may have the right to terminate the LOI. In extreme cases, you could face legal liability. And beyond the legal risks, loose lips can torpedo deals. If employees hear about a sale before you're ready to communicate, if customers get wind of it, if competitors learn your situation, any of these can damage your business and your leverage.

Due Diligence Access

The LOI will commit you to providing the buyer access to your business for due diligence purposes. This typically includes:

• Full access to books, records, and financial systems
• Meetings with key employees
• Access to customer contracts
• Customer reference calls (usually coordinated through you)
• Site visits
• Information about technology, IP, legal matters, etc.

Watch for:

• Customer call coordination: You should control which customers are contacted and how. The LOI should require your consent before any customer outreach.
• Employee interviews: Similar story. Buyers should not be able to talk to your employees without coordination, and you should be able to limit who gets disclosed to.
• Competitive information: What happens to the information if the deal dies? Standard NDAs cover this, but make sure the protections are adequate.

The diligence process is covered in detail in Chapter 9. At the LOI stage, your goal is simply to understand what you're committing to.

Conditions and Contingencies

Every LOI includes conditions that must be satisfied before closing. While obviously a buyer can walk away (or dramatically retrade) at any time and for any reason pre-close, there are reputational costs to doing so for no good reason. Think of these listed conditions more as "I told you we'd be out if..."

Due Diligence Condition

Every LOI includes some version of: "Subject to Buyer's satisfactory completion of due diligence." This is the broadest out. If the buyer finds anything they don't like—anything at all—they can claim diligence was unsatisfactory and walk.

You cannot negotiate this away. But you can assess the likelihood that a buyer will close a transaction based on a couple of things:

• How much diligence has already been completed? A buyer who's done months of pre-LOI diligence has less room to be surprised than one who's moving fast on limited information.
• What specific diligence items remain? The LOI may itemize remaining work. More specificity is better.
• Are they engaging third-party advisors? Quality of earnings firms, legal counsel, tech diligence providers—if they've engaged these parties, they're serious (as money is being committed). Note that most of the time, these won't be hired until after an LOI is signed.

Financing Contingency

A financing contingency means the buyer doesn't have the money yet. They're planning to borrow, or raise equity, or otherwise secure funds after signing the LOI. If they can't get financing, they walk.

This is a major red flag.

Most serious buyers at this deal size do not have financing contingencies:

• PE firms have committed capital from their funds
• Strategic acquirers use balance sheet cash or existing credit facilities
• Even search funds should have equity commitments lined up before submitting LOIs

If an LOI includes a financing contingency, ask hard questions: What financing are they seeking? How confident are they in securing it? What happens if they can't?

Best practice: require that any financing contingency be specifically identified (lender, amount, terms) with a commitment letter delivered within a short window after LOI signing. If they can't get a commitment letter, they're not ready to buy your company.

Board / Investment Committee Approval

PE buyers often require approval from their investment committee before signing definitive documentation. Strategic acquirers may need board approval. These are real requirements—but they're not all equal.

Questions to ask:

• Has the IC already reviewed this deal? If so, what was the outcome? Many PE firms require preliminary IC approval before extending LOIs. The post-LOI approval is then confirmation, not initial review.
• Is the deal within management authority? Some strategic acquirers can close deals under a certain size without board involvement.
• What approvals remain after LOI signing? Get specificity on who needs to approve what.

An LOI from a PE firm that says "This LOI has been reviewed and approved by our investment committee; no additional approvals are required" is much stronger than one that says "Subject to approval of Buyer's Board of Directors."

Material Adverse Change (MAC)

LOIs typically condition closing on there being no "material adverse change" in the Company between signing and close. If something bad happens (you lose a major customer, your revenue falls off a cliff, key employees quit), the buyer can walk.

MAC clauses are heavily negotiated in definitive documents. At LOI stage, they're usually just flagged as a condition. You can't negotiate them away, but you should understand they exist.

People and Post-Close Terms

Beyond economics, LOIs address what happens to the humans involved: founders, key employees, the team you've built.

Employment and Consulting Arrangements

Most buyers expect founders to stay involved post-close, at least for a transition period. The LOI may reference this expectation without specifying terms.

What the LOI usually doesn't include: your salary, title, reporting structure, responsibilities, or the conditions under which you can leave or be terminated. Those get negotiated separately, usually in parallel with the definitive purchase agreement.

If continued employment is a condition to closing, pay attention. You're being asked to commit to working for the buyer without knowing the terms. Push to negotiate at least the framework of your employment arrangement before signing the LOI, or clarify that the terms will be mutually acceptable or at market rates or similar.

Some founders want to exit quickly; others want to stay indefinitely. Both are achievable. What matters is aligning expectations. If the buyer expects you to stay for three years and you're planning to leave in six months, you have a problem that's better surfaced now than after signing the LOI.

Non-Competition Agreements

Buyers will require non-competes from founders and significant shareholders. This is standard and non-negotiable—they're not going to pay millions for your company if you're free to start a competitor the next day.

Typical terms:

• Duration: 3-5 years
• Geographic scope: Often worldwide for SaaS businesses
• Industry scope: Your industry and adjacent areas

The LOI usually just flags that non-competes will be required. The specific terms get negotiated later. But if you have concerns about the scope (perhaps you want to be able to work in adjacent areas, or the time period seems too long), raise them before signing.

Key Employee Retention

Buyers often identify key employees they need to retain for the deal to make sense. The LOI may mention specific individuals who must agree to stay, retention bonuses or pools, and whether retention is a condition to closing.

If the buyer is conditioning closing on specific employees agreeing to remain, you should know that before signing. What if those employees don't want to stay? What if they want more money than the buyer is willing to pay? You don't want to be in a position where your deal dies because someone else refused to cooperate.

Management Incentives

In PE transactions, new equity incentive grants for continuing management are common. The LOI may reference this. Details are sparse at LOI stage. But if you're expecting to participate meaningfully in future upside, confirm that the LOI at least acknowledges this expectation.

Red Flags and Deal Breakers

Some LOI provisions should make you pause. Others should make you walk.

Economic Red Flags

• "Up to" language on headline value: Means the stated number is the ceiling, not the offer.
• Earnouts tied to metrics you don't control: Combined company revenue, EBITDA margins after integration, customer retention across a merged business. If you can't influence it, you probably won't earn it.
• Working capital definitions including unusual items: Deferred revenue treatment, prepaid expenses excluded, aggressive definitions of current liabilities.
• Rollover into unclear securities: "Equity in the buyer" without specifying class, preference, or terms
• No R&W details at all: Completely silent on escrow, holdback, insurance. Leaves everything to later negotiation when your leverage is reduced.

Process Red Flags

• Unusually long exclusivity with no termination rights: 120 days with automatic extensions and no ability for you to exit? You're being locked up.
• Financing contingency: They don't have the money.
• Vague approval language: "Subject to various internal approvals" without specifying what those are.
• Unrealistic timeline claims: "We'll close in 30 days" when they haven't done any diligence. Either they're naive or they're lying.

Behavioral Red Flags

• Pressure to sign immediately: "This offer expires in 24 hours" is almost always artificial urgency.
• Resistance to your lawyer's involvement: A buyer who discourages you from getting legal advice is not acting in good faith.
• Unwillingness to answer questions: If they won't explain their earnout structure or rollover terms, what are they hiding?
• History of broken deals: Ask around. If this buyer has a reputation for signing LOIs and then retrading or walking, proceed with caution. Your banker should be excellent help here - we at Discretion maintain a blacklist and even beyond that can very often give you a good sense of a buyer's likelihood to close at the terms the LOI specifies.

When to Walk Away

Some situations warrant declining to sign an LOI:

• Financing not committed and no clear path to commitment
• Earnout structure mathematically designed to fail (unless you're fine with the non-earnout portion)
• Buyer behavior during LOI negotiation suggests bad faith
• Terms materially worse than market without clear justification

Walking away from an LOI is painful. You've invested time, developed a relationship, perhaps gotten emotionally attached to the outcome. But signing a bad LOI, then spending three months in exclusivity with a buyer who can't or won't close, is worse. You lose time, momentum, and the ability to talk to other buyers who might actually transact.

The Founder Takeaway

The LOI is where aspirational conversations become concrete commitments. It's where the game gets real. And it's where your leverage, while still substantial, begins its slow decline toward closing.

Most founders sign their first and only LOI without fully understanding what they're agreeing to. The buyers on the other side have signed dozens. Their lawyers have drafted hundreds. They know exactly which provisions protect them, which ones give them flexibility, and which ones lock you in.

LOI Checklist

Before signing any LOI, confirm you understand:

Economics

• Total enterprise value (specific number, not a range)
• Cash at close percentage and approximate dollar amount
• Earnout metrics, timeline, and structure (if any)
• Rollover percentage and entity (if any)
• Seller note terms (if any)
• Working capital target or methodology
• Escrow/holdback amount and duration
• How your transaction expenses will be handled

Process

• Exclusivity period duration
• Exclusivity extension provisions
• Your termination rights (if any)
• Buyer’s remaining due diligence items
• Expected timeline to close

Approvals and Financing

• Financing confirmed (no contingency)
• Board/IC approval status
• Other required approvals

People

• Post-close employment expectations
• Non-compete expectations
• Key employee retention requirements

Review

• Your M&A attorney has reviewed the LOI
• Your banker has confirmed economics are market-appropriate
• You can model your expected proceeds with reasonable confidence

This guide is for informational purposes only and does not constitute legal, tax, or financial advice. Consult qualified advisors before making decisions regarding your transaction.