Guide context
Understand the mechanics before the negotiation starts
Core transaction concepts matter because they often determine how headline value converts into real economics for shareholders. Buyers, lenders, and counsel may use the same term differently depending on structure, timing, and diligence findings.
Use this guide to clarify the commercial issue before a process becomes time-sensitive. The right interpretation depends on company size, sector, geography, financial profile, buyer universe, and the leverage available when terms are negotiated.
Before a term is accepted, shareholders should ask how it will be measured, who controls the calculation, what information supports it, and whether the answer can change between signing and closing.
This concept is often evaluated alongside The M&A Sale Process: How It Works, Quality of Earnings Report, and What is Working Capital in M&A?. because value, diligence, structure, and closing certainty are usually connected.
What an LOI includes
A typical M&A LOI covers: the proposed enterprise value and equity consideration, including any adjustments for cash, debt, and working capital; the deal structure (share purchase vs. asset purchase); the exclusivity period during which the buyer has the right to complete diligence and negotiate final documentation; conditions to closing; the proposed timeline for completing due diligence and signing the SPA; key employment and post-closing arrangements for the management team; and any significant assumptions underpinning the valuation (normalised EBITDA figure, assumption about working capital peg). The detail in the LOI varies significantly — some LOIs are one page; others are ten pages and set out many terms that will ultimately appear in the final SPA.
What is binding and what is not
An LOI is typically non-binding on the commercial terms — meaning neither party is legally committed to complete the transaction at the agreed price if circumstances change. However, certain provisions are binding: the exclusivity clause (the seller cannot solicit or negotiate with other buyers during the exclusivity period), the confidentiality obligations, and the break fee provisions where agreed. This distinction matters. A seller who signs an LOI and then receives a better offer during the exclusivity period is contractually prohibited from acting on it. Understanding the exclusivity terms — their length, their scope, and the conditions under which they can be terminated — is one of the most important elements of LOI review.
The exclusivity trap
Exclusivity is the most significant constraint in an LOI for sellers. Once you sign, your negotiating leverage diminishes substantially — you cannot use competing interest to maintain pressure on price or terms. Buyers understand this and will use the exclusivity period to run extensive diligence, surface issues, and negotiate price reductions. Sellers who enter exclusivity with a single buyer, before receiving competing bids, are in the weakest possible negotiating position. The right approach is to run a competitive process, receive multiple LOIs, and select the best one — giving the winning buyer exclusivity to complete, not to explore.
Price adjustment mechanics in the LOI
The enterprise value stated in an LOI is not the amount the seller receives. The equity value — what actually lands in the seller's bank account — is calculated as enterprise value, minus debt and debt-like items, plus excess cash, and then adjusted for actual vs. normalised working capital at closing. The working capital peg — the 'normal' level of working capital the business is assumed to have at close — is a significant and often contentious negotiation point. Sellers who do not understand how the working capital adjustment works when signing the LOI frequently receive less at closing than they expected.
When the price changes after LOI
Receiving an LOI at an agreed enterprise value does not guarantee you will receive that value at closing. Price re-trades — where the buyer seeks to reduce the price after exclusivity is granted, typically citing issues surfaced in due diligence — are one of the most common and frustrating experiences for sellers. They are also partially preventable. Sellers who have run thorough preparation, commissioned a sell-side QoE, and been transparent in their process materials reduce the scope for legitimate re-trade arguments. A well-run competitive process with multiple credible bidders also reduces re-trade risk — buyers who re-trade aggressively in competitive processes risk losing the deal to a competing bid.
Questions to resolve
Turn the concept into a decision
The practical value of this guide is highest when the concept is tested against the company's facts, shareholder objectives, counterparty universe, and timing. Before relying on the analysis in a live transaction discussion, owners and boards should resolve the following questions.
- What company-specific facts support the guidance in "What an LOI includes", and what documents or adviser input would make that answer credible to buyers, lenders, investors, or a board?
- What company-specific facts support the guidance in "What is binding and what is not", and what documents or adviser input would make that answer credible to buyers, lenders, investors, or a board?
- What company-specific facts support the guidance in "The exclusivity trap", and what documents or adviser input would make that answer credible to buyers, lenders, investors, or a board?
- How does this topic interact with The M&A Sale Process: How It Works and Quality of Earnings Report, and would those related issues change valuation, proceeds, structure, timing, or closing certainty?